The government has declared its intention to boost the supply of dwellings in urban areas by revitalizing reconstruction and redevelopment; however, criticisms have arisen that the policies being applied in the market are having the opposite effect. With the mandatory certification of zero-energy policies, construction costs are expected to increase further. Additionally, the loan regulations from the June 27 measures, which apply to relocation loans, have increased the likelihood of delays in reconstruction projects.
According to the maintenance industry on the 15th, the construction costs of major reconstruction complexes in Seoul are exceeding 10 million won per 3.3 square meters. The reconstruction association of the Daekyo apartment in Yeouido, Yeongdeungpo District, set the construction cost at 11.2 million won per 3.3 square meters in the bidding announcement released on the 10th. This is the highest amount among the reconstruction complexes in Yeouido. The Yeouido Gongjak apartment had estimated a construction cost of 10.7 million won per 3.3 square meters in 2023.
Additionally, the Gangnamwon Hyosung Villa reconstruction association in Seorae Village, Bangbae-dong, Seocho District, signed a construction contract at 15.5 million won per 3.3 square meters last June. The construction cost in Apgujeong District 2 is 11.5 million won per 3.3 square meters, while in Hannam District 2, it is 9.39 million won.
The biggest reason for the skyrocketing construction costs is the rise in material prices. According to the Korea Institute of Civil Engineering and Building Technology, the construction cost index as of May (2020=100) was 131.01, an increase of more than 30% compared to May 2020. The push for upgrading in these complexes has also contributed to the rise in construction costs.
Future construction costs are likely to rise further. This is because the amended 'energy-efficient eco-friendly housing construction standards' will apply to the business plan approval applications submitted after the 30th of last month. Future apartments will need to improve energy performance by enhancing the grade of insulation materials and steel doors (entrance doors), while reducing the lighting density per unit area. The Construction Industry Research Institute has analyzed that this could increase the construction costs of multi-family dwellings by up to 8%.
The June 27 measures announced last month are also expected to become obstacles for reconstruction projects. During the management and disposition plan approval stage, the rights value and sale price for members and the additional burden amounts are confirmed; however, the following stage of relocation and demolition limits the relocation loan to 600 million won. This regulation applies to all reconstruction complexes that did not receive management and disposition approval by the 27th of last month. According to the Seoul City, 53 construction sites and 48,000 dwellings fall under this regulation.
Financial authorities view the relocation costs as loans that effectively belong to individual members and consider them the same as mortgage loans. However, many argue that this is unreasonable because it effectively depends on the credit of the construction company involved. Relocation funds are used by members to find rental homes during the construction period once demolition begins.
In particular, reconstruction complexes in Seoul, including Gangnam, Yeouido, and Yongsan, have been hit hard due to high asset valuations. The previously assessed value of these reconstruction complexes is at a maximum of 3 billion won, with basic relocation costs of 1.5 to 2 billion won. Areas such as Hannam District 2, Yeouido Daekyo apartment, Gangnam's Gaepo Woosung 6th and 7th, and Songpa's Jamsil Woosung 4th face challenges, as finding residential spaces with a relocation cost of 600 million won is difficult due to expensive surrounding rent prices. For members with existing homes, they must sell their properties within 6 months to qualify for a relocation loan.
However, it is possible to obtain additional relocation costs from financial institutions based on the credit of the construction companies. Nevertheless, this is generally at a higher interest rate than the basic relocation costs, making it less desirable. An official from a major construction company noted, "Additional relocation costs exceeding 600 million won can be secured through the credit of the construction company, and there may be differences based on the initial business proposal," adding, "Until now, due to high interest rates, members have not favored additional relocation costs, but there may be demand for them due to this loan regulation."
Park Hapsu, a visiting professor at the Konkuk University Graduate School of Real Estate, stated, "Relocation loans should not be seen as ordinary mortgage loans, but rather as a relocation measure during the reconstruction process," adding, "As delays in maintenance projects can negatively impact supply, there is a need to exclude relocation loans from this loan regulation."