Korea Real Estate Market Report

Transcription

1 Vol. 4 Korea Real Estate Market Report Real Estate Research Institute of KAB

2 KAB Real Estate Market Report Greetings The Korea Appraisal Board (KAB) Real Estate Research Institute publishes the vol. 4 of Korea Real Estate Market Report (first half trends and second half outlook for 2016). In this volume, we conducted an indepth analysis and outlook of the real estate market by major topics. The real estate market in the first half of 2016 can be described by a decline in consumers willingness to purchase following the imposition of the household debt management policy and the increase in housing supply. But we could witness a polarization between the capital area, where housing prices increased due to the decreased interest rate and reconstruction projects in the Gangnam area, and other areas such as Daegu and Ulsan, which showed an acceleration in decline due to the economic downturn in industries such as shipbuilding and the accumulation of new housing supply. As for the prospect of the real estate market, it is possible for the markets, especially where more housing was supplied, to be contracted due to the increased uncertainty in the domestic economy derived from Brexit and increased strictness in judging loans such as group loan. But, we can expect a increase in real demand overall, because of the impact of decreased interest rate and the maintenance of the low interest rate, and the policy for liquidity while we expect that the polarization between the Capital area and other areas will continue.

3 In this volume of the report, some in-depth analyses are included to increase the understanding about the real estate market. These include analyses on ordinary people s expenditure on housing with more details and the development of efficient policies for aiding hosing expenditures, and suggestions on the development of indices for rent expenditures given the recent decrease in Jeonse (a specific form of house leasing contracts in Korea that only require deposit money instead of monthly fee) and the acceleration of transition into monthly rent. In addition, there is analysis on the changes in the house sales market and the subdivision right market after the total management policy for household debt was applied by stages from this February, for each market and region. Relevance and causal relationship between house price and trading volume is analyzed to prepare the effective measures for more active or more stable house trading market. KAB will do its best to offer deeper and trendy information through the [Korda Real Estate Market Report], improving the stability of public housing and contributing to the development of policies for a more advanced real estate market. Thank you. Real Estate Research Institute of KAB Director Chae Mie Oak

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5 CONTENTS PART 1 Market Trends 1 Macro Economy and Real Estate Market 2 Housing Market 9 Land Market 30 Commercial Real Estate Market 46 PART 2 Real Estate Market Outlook in the Second Half of PART 3 In-Depth Analysis 73 Analysis 1 Pilot production of Housing Cost Ratio Index and Implications 74 Analysis 2 Designing the Jeonse and Monthly Rent Transition Rental Cost Burden Index Development 85 Analysis 3 The Changes in the Housing Market After the Household Debt Total Management Plan 99 Analysis 4 Analyzing the Causality Relationship between the Housing Price and the Housing Trading Volume 107 PART 4 Issue Analysis 115 Trend in Transaction Volume and Transaction-Based Real Estate Price Index of Town House and Multi-Housing 116 Changes in Building Construction Standards and Trends in Price of Officetel 125 Recent Household Debt Status and Structural Changes 139 Market Trends and Outlook of Logistics Real Estate 144

6 KAB Real Estate Market Report

7 Korea Real Estate Market Report P A R T 1 Market Trends Macro Economy and Real Estate Market Housing Market Land Market Commercial Real Estate Market

8 Macro Economy and Real Estate Market Min Chulhong Domestic Economic Trends For the domestic economic trends, its low growth rate continues as the domestic consumption reduces and the frustrated export continues. The rate of economic growth in Q was reported as 2.8% compared to the same period a year ago, which is reduction from 3.1% in Q. Private Consumption The increase rate of private consumption showed recovery trend after 1.1% in Q, but the rate decreased to 2.2% in Q by 1.1%p from the same period a year ago, which indicates private consumption s decreasing pattern. 400 Figure 1-1 Real GDP and growth rate `03.1Q `04.1Q `05.1Q `06.1Q `07.1Q `08.1Q `09.1Q `10.1Q `11.1Q `12.1Q `13.1Q `14.1Q `15.1Q `16.1Q Source: Bank of Korea a rate of economic growth(real, raw, compared to the same period last year%)(right) GDP(market price, trillion won)(left) 2 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

9 P A R T 1 Market Trends Figure 1-2 Private consumption rate of change (unit: %) Figure 1-3 Equipment investment rate of change (unit: %) 8% 6% 4% 2% 0% `10.1Q `11.1Q `12.1Q `13.1Q `14.1Q `15.1Q `16.1Q Private consumption rate of change (real, compared to the same period last year) Source: Statistics Korea 30% 20% 10% 0% -10% `10.1Q `11.1Q `12.1Q `13.1Q `14.1Q `15.1Q `16.1Q Equipment investment rate of change (real, compared to the same period last year) Source: Statistics Korea Equipment Investment The increase rate of equipment investment decreased by 4.5% in Q and this pattern is predicted to continue for a while due to the persisting frustrated exports derived from negative global economic conditions. Table 1-1 Construction investment by sector, the change rate in construction payment and amount of order (unit: compared to the same period last year, %) Q 1Q 2Q 3Q 4Q 1Q Construction investment Building construction Residential building Non-residential building Engineering construction Construction payment Building Engineering Construction order amount Building Engineering Note: With seasonal adjustment, rate of change (%) of real (construction investment for gross capital formation), fixed (construction payment), and current (construction order amount) account compared to the same period last year Source: Statistics Korea 3

10 Trends of Construction Business Construction investment showed a mild increasing trend due to the enhancement of success in housing subdivision since the second half of 2015, especially with construction business. Construction Investment With Capital area as a centering figure, the successful housing subdivision influenced the increase of residential building investment by 23.06% and nonresidential building investment by 8.39%, leading to the increase of construction investment by 9.59% in 2016 Q1. Construction Payment While the previous decreasing trend in the engineering payment was transiting to increasing trend, construction payment enhanced its increasing trend to 14.62% in 2016 Q1 thanks to the enhanced building payment which showed 22.22% in 2016 Q1. Construction Order The increasing gap was slashed to 14.30% in 2016 Q1 and the increasing trend was diminished, which were derived from increased sales and base effect in 2015 Q1. The portion of construction investment to GDP showed the decreasing trend since 2013, but the portion of construction investment to residential building has been increased from In 2015, the portion of investment on the residential building has been consistently 25% Figure 1-4 The portion of construction investment to GDP 20% 15% 10% 5% % Residential building Non-residential building Engineering construction Source: Statistics Korea 4 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

11 P A R T 1 Market Trends increasing to 4.4%, which indicates the increasing portion of construction investment to GDP compared to The market shows relatively stable trends after the increased volume of unclaimed supply in the second half of 2015, but this seems to be transited to recently accumulated permissions, licenses, commencements, and completions, so that periodic monitoring for the unclaimed supply is likely to be necessary in the future. Figure 1-5 Unclaimed supply trends (unit: 1,000 unit) `13.1M `13.6M `13.11M `14.4M `14.9M `15.2M `15.7M `15.12M `16.5M Source: Ministry of Land, Infrastructure and Transport Figure 1-6 Housing construction commencements (unit: 1,000 unit) % % % 80 20% % 20-20% 0-40% `13.1M `13.9M `14.5M `15.1M `15.9M `16.5M Housing construction commencement compared to the same period last year rate of change(right) Housing construction commencement(left) Source: Ministry of Land, Infrastructure and Transport Figure 1-7 Housing construction permissions and licenses (unit: 1,000 unit) % % % 80 20% % 20-20% 0-40% `13.1M `13.9M `14.5M `15.1M `15.9M `16.5M Housing construction permissions and licenses compared to the same period last year rate of change(right) Housing construction permissions and licenses (left) Source: Ministry of Land, Infrastructure and Transport Figure 1-8 Housing completions (Multi-housing by individual unit) (unit: 1,000 unit) 120% 90% 60% 30% 0% -30% 0-60% `13.1M `13.9M `14.5M `15.1M `15.9M `16.5M Housing completion compared to the same period last year rate of change(right) Housing completion(left) Source: Ministry of Land, Infrastructure and Transport 5

12 Unclaimed supply in increased to 55,000 units by 3.0% compared to the last month and showed relatively stable trends after the onetime increase of unclaimed supply in The total number of housing construction commencement in was 238,000 in sum, which indicate the 6.5% of increase than the same period a year ago. Housing construction permissions and licenses were 275,000 cases increased by 21.3% from the same period a year ago even though there was the concern about the enlarged supply of 765,000 units in Housing completions which show lagged revelation after the permissions, licenses, and commencements increased to 187,000 units by 26.8% in compared to the same period last year as the result of consistent supply in 2014 and Loan Market Trends Household loan in 2016 Q1 was reported as 1,158 trillion won while increasing by 1.6% compared to the same quarter previous year and decreasing by 2.8%p in increasing ratio compared to the ratio in 2015 Q4 (4.4% increase compared to the previous quarter). 806 trillion won of household loan in 2011 Q1 increased to 1,158 trillion won in 2016 Q1 by 352 trillion won within 5 years. The recent increasing trend of household loan is derived from the significant increase in the collective loan approval in 2015, and this trend is predicted to continue mainly related with housing mortgage loan for a while. The overall pace of increasing household loan in 2016 Q1 was reduced, but non-bank household loan was increased rather than bank household loan. The second stage of Loan Approval Improvement Guideline that starts from this July covers insurance companies, but does not mutual savings banks and loan companies. This requires close monitoring and management about the vulnerable social groups given the relatively higher interest rate and more variable interest rate in the nonmonetary institutions. 6 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

13 P A R T 1 Market Trends 1,500 1,200 Figure 1-9 Trend of household loan and housing mortgage loan ,158 1, , `10.1Q `11.1Q `12.1Q `13.1Q `14.1Q `15.1Q `16.1Q Bank housing mortgage loan(trillion won) Household loan(trillion won) Household loan Source: Statistics Korea Figure 1-10 Rate of change of household loan and housing mortgage loan 4% 3% 2% 1% 0% -1% `10.1Q `11.1Q `12.1Q `13.1Q `14.1Q `15.1Q `16.1Q Household loan rate of change(compared to previous quarter) Bank housing mortgage loanrate of change (compared to previous quarter) Source: Statistics Korea Forecast about External Environments The rate of global economic growth is slowing down, and the uncertainty of European countries growing due to Brexit, the economies of developing countries are in stagnation, and the low price of oil continues, so that these risk factors will lower the originally estimated rate of economic growth. For U.S., we expect the low probability of increasing interests rate because of recent negative employment index and Brexit. The likelihood of fiscal austerity seems to be low for a while due to the decreased growth in manufacturing industries and labor productivity. For Japan, negative impact on Japanese firms exporting is expected because the weakened value of Japanese yen by Abenomics is likely to sharply rise due to the preference on risk free assets after Brexit and the disappointment about the impact of the weak yen. For China, the decreasing gap of exports is enlarged and domestic consumption reduces, showing that the trends of growth slows down. Related adjacent Asian countries are also in similar economic slowdown with China, so that this pattern is more likely to continue for a while. For European countries, Brexit seems to trigger a political insecurity which should be reorganized by Germany. The pressure on lowering the value of euro and the adoption of 7

14 quantitative easing are predicted given that U.K. showing the economic growth among overall economic downturn in EU is exiting. The trend of low oil price is forecasted to continue for a while because of global economic slowdown, limited demand for oil, Iran s oil oversupply and so on. Table 1-2 IMF report and outlook about a rate of economic growth World Developed countries Developing countries U.S. China EU Japan Korea ` `16(e) `17(e) Source: IMF (`16.4) (unit: %) The real estate markets of the major countries show different patterns depending on the extent of economic recovery by each country. In 2015, U.S. and Australia increased the growth rate whereas U.K. showed slowdown in price rise. Japanese market turned into increasing trend after 2013, and the growth rate increased. China is recovering from downturn after Continuous monitoring seems to be necessary given the strong global factors pressing the market down in 2016, such as the political and economic issues in Europe, the negative employment index in U.S., and the instability in crude oil market. Table 1-3 The change rate of housing price (unit: to previous year, %) U.S. U.K. Australia China Japan Korea ` ` ` ` Source: BIS 8 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

15 P A R T 1 Market Trends Housing Market Lee Junyong, Min Chulhong Trend of House Price 1) Trend of House Price in the First Half of 2016 House Sale Price In the first half of 2016 (by the end of June), the nationwide increase rates of the house sale price were 0.1% for both house and apartment, which show the obvious Table 1-4 In the first half of 2016, the change of sale price by regions Region Change of house sale price Change of apartment sale price `14 `15 `14. 6 `15. 6 `16. 6 `14 `15 ` ` ` Nationwide Seoul Busan Daegu Incheon Gwangju Daejeon Ulsan Sejong Gyeonggi Gangwon Chungbuk Chungnam Jeonbuk Jeonnam Gyeongbuk Gyeongnam Jeju Note: The highlighted cells in the column of ` represent the regions showing increased price in than the price in (the meaning of other highlighted cells are all the same in the following tables) 9

16 slowdown in the growth compared to the same period of 2015 (house was 1.8%, apartment was 2.6%). The exceptional case is Jeju where the sale price of apartment increased in the first half of 2016 (by the end of June) than the same period of 2015, and the growth continues. Regions which show the decreased sale price of apartment in the first half of 2016 (by the end of June) are Gyeongbuk (-2.0%), Daegu (-1.9%), Chungnam (-1.6%), Chungbuk (-1.7%), Daejeon (-0.3%), Jeonbuk (-0.3%), and Gyeongnam (-0.3%). House Jeonse Price The nationwide increase rates of Jeonse (Korean specific form of house leasing contract requiring only deposit money instead of monthly fee) price for house and apartment in the first half of 2016 (by the end of June) are 0.7% and 1.1% respectively, which are lower and more stable than the rate in the same period of 2015 (2.7%, 3.8%). In most regions, the price increase rate of Jeonse was lower than the same period of 2015, and Table 1-5 In the first half of 2016, the change of Jeonse price by regions Region The change of house Jeonse price The change of apartment Jeonse price `14 `15 `14. 6 ` ` `14 `15 ` ` ` Nationwide Seoul Busan Daegu Incheon Gwangju Daejeon Ulsan Sejong Gyeonggi Gangwon Chungbuk Chungnam Jeonbuk Jeonnam Gyeongbuk Gyeongnam Jeju Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

17 P A R T 1 Market Trends the exceptional regions also showed marginal increase rate (Daejeon, Jeonbuk, and Sejong) During the first half of a year as a moving season and the start of a new semester, the increase of Jeonse price is a common pattern. But, there was an influence of other psychological factors in the first half of 2016, such as concerns about increased house supply and permissions. Especially, most of new residents in provincial cities like Daegu, Gwangju, and Jeju that led the Jeonse market now settled down in the innovation cities, so that the increase rate of Jeonse price in the first half of 2016 significantly slowed. Summary Whereas Capital area and Daegu, Gwangju, Jeju regions led the increase of house sale price in 2015, only Jeju maintained the increase trend in the first half of 2016 while other regions showed steadiness or price drop. Table 1-6 Summary of house price change in the first half of 2016 Increase Stabilization Price change Jeonse price increase > Sale price increase Sale price or Jeonse price increase Steadiness & decrease Marginal increase Sale dominance Sale=Jeonse Jeonse dominance `15 ` House Apartment House Apartment Seoul, Incheon, Gwangju, Gyeonggi Seoul, Incheon Gwangju, Gyeonggi Daegu, Jeju Daegu, Jeju Jeju Busan, Ulsan, Gyeongbuk Sejong, Gangwon, Jeonbuk, Jeonnam, Gyeongnam Daejeon, Chungbuk, Chungnam Busan, Ulsan, Gangwon, Chungbuk, Chungnam, Gyeongbuk Sejong, Jeonbuk, Jeonnam, Gyeongnam Daejeon Jeju Seoul, Busan, Daegu, Gwangju, Daejeon, Ulsan, Gyeonggi, Gangwon, Chungnam, Jeonbuk, Jeonnam, Gyeongbuk, Gyeongnam Incheon, Sejong, Chungbuk Sejong Seoul, Busan, Daegu, Gwangju, Ulsan, Gangwon, Chungnam, Jeonbuk, Jeonnam, Gyeongbuk, Gyeongnam Incheon, Daejeon, Gyeonggi, Chungbuk Note: The cut off line for increase is 5% or more in annual price increase rate, for marginal increase 2.5% or more and less than 5%. Al other cases fall into steadiness or decrease, the threshold for similarity is within 1% of differences between price increase rates. The used period above was applied to adjust the standards for price increase rate (e.g., For 2015, we used annual average for the standard, but for the standard of 6 months was applied.) 11

18 Overall, most regions show stabilized sale price and Jeonse price without any outliers. Daegu, Gyeongbuk, and Chungnam regions showed the price drops in both sale and Jeonse, which can be interpreted as the results of consistent increase in house supply to these regions. - Since there are intensive increase of housing supply to these regions, so that consistent monitoring about unclaimed housing supply is necessary in the future. On the other hand, Ulsan shows overall steadiness and increase, but its specific areas like Dong-gu where shipbuilding workers and related workers reside showed drop in both Jeonse price and sale price in the first half of 2016 (by the end of June), which are sensitive to the shipbuilding businesses. 2) Price Trend of Capital Area Apartment Apartment Sale Price in Seoul by Size The apartment price of Seoul in 2015 increased to around the small and medium sizes, but the increase gap has been significantly reduced in the first half of 2016 (by the end of June). In the first half of 2016 (by the end of June), the small small-medium medium mediumlarge large apartments of Seoul Gangbuk area showed the increase rates of sale price by 0.8%, 0.5%, 0.5%, 0.4%, and -0.1, respectively, while Gangnam area as 1.2%, 0.8%, 0.9%, 0.6%, and 0.4%. These numbers are lesser than the one-fifth of 2015 s yearly change rates, which indicate the reduced increase gap. Figure 1-11 Seoul area s change rate of apartment sale price by size (nominal) Seoul Gangbuk area Seoul Gangnam area 10% % % % % % -2% small small-medium medium medium-large large % small small-medium medium medium-large large Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

19 P A R T 1 Market Trends Apartment Jeonse Price in Seoul by Size Just like the sale price, the Jeonse price of Seoul area reduced its increasing gap regardless of size, and the Jeonse price increase rate of small and smallmedium size apartments remained still with marginally higher level to other sizes. Even though the Jeonse price of small apartment still shows the increasing trend, the increasing rate in the first half of 2016 was less than the past 1 or 2 years, which indicate the obvious signal of stabilization. Summary of Seoul Area In 2015, the number of up-area 1) showing greater increase than longterm average increase had been increasing in Seoul apartment sales markets, but it turns into decreasing pattern after From 2015, the number of up-area in apartment Jeonse market increased until recent a recent date, so that apartment Jeonse price increase rate in the most of gu areas while exceeding the long-term average. By the first half of 2016(by the end of June), the areas with the higher sale price increase rate compared to the same period last year are Dongdaemun-gu(6.6%), Gangnam-gu(5.8%), Gangseo-gu(5.8%), and Seongdong-gu(5.2%), but this increasing trend gradually slowed down. Figure 1-12 Seoul area s change rate of apartment Jeonse price by size (nominal) Seoul Gangbuk area Seoul Gangnam area 15% 12% 9% % 12% 9% % 3.5 6% 3% % % small small-medium medium medium-large large % small small-medium medium medium-large large ) The criterion of down-area is the si, gun, and gu with lower than 0 of change rate in the month compared to the same month last year. The criterion of stable area is the si, gun, and gu with 0 < change rate in the month compared to the same month last year long-term annual average change rate of the si, gun, and gu ( ~ ). The criterion of up-area area is the si, gun, and gu with change rate in the month compared to the same month last year > long-term annual average change rate of the si, gun, and gu ( ~ ). (Following criteria will be same.) 13

20 - Given that the previous up areas like Eunpyeong-gu, Seodaemun-gu, Mapo-gu, Yangcheon-gu, Songpa-gu, and Gangdong-gu are now categorized into stable area Seoul Jeonse market seems to enter overall stable stage. The four gu areas of Gangnam were obviously the center of increasing Jeonse price in 2015, but the increasing gap has been significantly reduced in 2016 while showing the increase rate compared to the same period last year as Seocho-gu for 4.1%, Gangnam-gu for 5.2%, Songpa-gu for 4.7%, Gangdong-gu for 4.4% with entering the stable area. - By the first half of 2016(June), Areas showing higher Jeonse price increase rate compared to the same period last year are Guro-gu(9.5%), Gwangjin-gu(9.0%), Gangseo-gu(8.8%), Gwanak-gu(8.8%), Nowon-gu(8.5%), Seongdong-gu(8.5%), and Dongdaemun-gu(8.4%) Figure 1-13 Seoul apartment price change area (gu) Apartment sale price ` ` ` ` the number of up-area the number of stable area the number of down-area 25 0 Apartment Jeonse price ` ` ` ` the number of up-area the number of stable area the number of down-area The Sale Price of Apartment in Incheon Gyeonggi by Size There was the marginal increase of the apartment sale price usually for small and small-medium size in Incheon and Gyeonggi during the first half of 2016 (by the end of June), while the price of medium and medium-large size apartments decreased. Especially, it is noteworthy to compare the remarkable increase rate of small size apartment sale price in Gyeonggi during 2015(8.1%) to 2016(0.6%). - However, there are some areas like Gyeonggi Gyeongwon area, (Pocheon, Dongducheon, Yangju, Uijeongbu) and Eastside two areas (Icheon, and Yeoju) showing the relatively delayed price slowdowns of small size apartment. 14 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

21 P A R T 1 Market Trends Figure 1-14 Sale price change of Incheon Gyeonggi by size (nominal) Incheon 10% Gyeonggi 10% 8.1 5% 0% % 0% % small small-medium medium medium-large large -5% small small-medium medium medium-large large Jeonse price change of apartment in Incheon Gyeonggi In 2014 and 2015, the Jeonse price in Incheon and Gyeonggi increased by 8~10%, but it increased only by 1~2% in the first half of 2016 (by the end of June). In most of Gyeonggi areas, small apartment increased by 10% or more in 2015, but but it increased only by 1~2% in the first half of 2016, which is similar pattern with other sizes. Alongside with the overall slowdown of sale price, the increasing trend of Jeonse price also quickly slows down, but the pace of the slowdown is sluggish in Gyeonggi Gyeongwon area because this area previously showed the slow increase of Jeonse price. Figure 1-15 Jeonse price change of Incheon Gyeonggi by size (nominal) Incheon 15% Gyeonggi 15% 12% 9% % 9% % 3% % 3% % small small-medium medium medium-large large 0% small small-medium medium medium-large large Summary of Incheon Gyeonggi The number of up-area had increased for apartment sale market in Incheon and Gyeonggi in 2015, but the number has sunken rapidly after This 15

22 pattern is similar with the Jeonse price of apartment. In the first half of 2016, the increasing rate of apartment sale price in Gyeonggi decreased, and stable area by 2016 June compared to the same period last year are Anyang(3.3%), Siheung(3.2%), Gwangju(2.7%), Ansan(2.7%), Anseong(2.6%), Suwon(2.4%), Seongnam(2.2%), Yongin(1.9%), Hanam(1.9%), and Pocheon(1.8%) Likewise, stable area showing the lowered Jeonse price increasing rate of apartment by 2016 June compared to the same period last year are Gwangmyeong(5.9%), Gwangju(5.3%), Anseong(4.6%), Hanam(4.5%), Icheon(4.5%), Gwacheon(4.5%), Suwon(3.9%), Seongnam(3.5%), and Yongin(3.4%). But, Pocheon(12.1%), Yangju(10.1%), Bucheon(9.0%), Dongducheon(8.7%), Goyang(8.5%), Uijeongbu(8.4%), and Paju(8.3%) are still showing high increasing rate of Jeonse. Figure 1-16 Price change in Incheon apartment 8 0 Apartment sale price ` ` ` ` the number of up-area the number of stable area the number of down-area 8 0 Apartment Jeonse price ` ` ` ` the number of up-area the number of stable area the number of down-area Figure 1-17 Price change in Gyeonggi apartment Apartment sale price ` ` ` ` the number of up-area the number of stable area the number of down-area 28 0 Apartment Jeonse price ` ` ` ` the number of up-area the number of stable area the number of down-area 16 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

23 P A R T 1 Market Trends Trends of Housing Transaction Volume 1) Housing Transaction Volume Summary The accumulated volume of housing transaction as of May 2016 is 375,000 units, which is lower than the same period of 2015 but higher than early 2010s which experienced downturn of housing market. By every year s May, Capital area s accumulated transaction volume in the first half of 2016 cannot be considered as low level only except for 2008(210,000) and 2015(230,000). For other regions, housing transaction volume by the first half of 2016(by May) is 110,000, which is high after 2010, 2011, 2014, and 2015 with the marginal differences. However, provincial Metropolitan cities housing transaction volume by 2016 May is 90,000, which is lower than their previous transaction volume, and the lower years than 2016 are only 2006, 2009, and In sum, the recent decrease in housing transaction volume seems to be mainly from provincial Metropolitan cities decrease, and this pattern will continue due to stricter loan approval for provinces and increased housing supply. Annual trend of transaction volume Figure 1-18 Trend of housing transaction volume by regions Jan to May trend of transaction volume (unit: 10,000 cases) `06 `07 `08 `09 `10 `11 `12 `13 `14 `15 ` `06 `07 `08 `09 `10 `11 `12 `13 `14 `15 `16 Capital area Five major Metropolitan cities Provincial region Capital area Five major Metropolitan cities Provincial region 17

24 Figure 1-19 Trends of housing transaction volume by regions and housing types Nationwide Capital area Non-Capital area 100% % % % % % % 60% 60% 40% % % % 20% 20% 0% 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q 2Q 0% 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q 2Q 0% 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q 2Q Apartment Multi-housing/row-house Single family house Apartment Multi-housing/row-house Single family house Apartment Multi-housing/row-house Single family house Note: 2016 Q2 ranges from April to May Source: RTMS By Housing Type In the first half of 2016 (by May), the portion of apartment transaction to total housing transaction decreases a little bit (Q1 66.9%, Q2 66.5%), while the portion of single family home increases (2015 Q4 20.4%, 2016 Q1 20.9%, 2016 Q2 21.6%) In Capital are, the portion of multi-housing and row-house transaction volume usually increase, but in non-capital area, the portion of single family home increases, which indicate the differences in portion between regions. Specifically, the portion of apartment transaction in Capital area clearly reduced during 2015 while the portion of multi-housing and row-house remarkably increased, but after 2016, there is no considerable change in any types of housing. For non-capital area, from 2015 to the first half of 2016 (by the end of May) the portion of multi-housing and row-house decreases and the portion of apartment and single family home increases. By Sale Price Range By 2015, the portion of low price range(krw 200 million and under) obviously decreased and the portions of medium-low range(over KRW 200 million and under KRW 400 million) remarkably increased, but in the first half of 2016(by the end of May) the portion of the low price range slightly increased nationwide. 18 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

25 P A R T 1 Market Trends Figure 1-20 Trends of housing transaction volume by regions and price ranges Nationwide Capital area Non-Capital area 100% 80% 60% % 80% 60% % 80% 60% % 20% % 20% % 20% % 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q 2Q 0% 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q 2Q 0% 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q 2Q million and under 200 ~ 400 million 200 million and under 200 ~ 400 million 200 million and under 200 ~ 400 million 400 ~ 600 million over 600 million 400 ~ 600 million over 600 million 400 ~ 600 million over 600 million Note: 2016 Q2 ranges from April to May Source: RTMS The portion of low price range in 2015 Q2 (52.6%) increased to 54.3% by 2016 Q2 (May), and the portions of medium-low range (200 to 400 million) and medium-high range (400 to 600 million) in 2016 Q2 (May) decreased to 30.5% and 9.0% compared to 2015 Q2 (32.7%, 9.2%). Capital area also showed the portion of low price housing increased after 2016 and the medium-low and medium-high decreased. High price range over 600 million marginally increased (Q1 9.0%, Q2 9.5%) In non-capital area, while the portion of low price range housing s sale transaction remains high, low price range transaction increases and other ranges decrease just like Capital area. - The increased portion of low price range transaction seems to be derived from accumulated fatigue of tenants due to the high Jeonse price and increased supply of alternative options like multi-housing and row-house. 2) Transaction Volume of Jeonse and Monthly Rent Summary While the transaction volume of Jeonse and monthly rent consistently increases, the transaction of Jeonse in the first half of 2016 (by the end of May) decreased and the decreased volume of Jeonse is almost exactly as much as the increases in monthly rent, which is a very consistent pattern observed since Jeonse and monthly rent confirmation 19

26 Figure 1-21 Trends of housing Jeonse and monthly rent by regions (unit: 10,000) Nationwide Capital area Non-Capital area Jeonse Monthly rent Jeonse Monthly rent Jeonse Monthly rent Source: RTMS dates were reported. The transaction portions of Jeonse and monthly rent were 59.0% and 41.0% in 2014, and in 2015, 55.8% and 44.2%, respectively, which indicate the decreased Jeonse and increased monthly rent. This pattern continued until the first half of 2016 (by the end of May), resulting in 54.0% of Jeonse and 46.0% of monthly rent. For Capital area, the portion of Jeonse transaction (55.1%) is higher than nationwide average (in the first half of 2016 (by the end of May), the portion of monthly rent is 44.9%, which is marginally lower than the nationwide transaction of monthly rent (46.0%). In the first half of 2016 (by the end of May), non-capital area s portion of Jeonse transaction is 52.2% lower than Capital area (54.0%), and the portion of monthly rent is 47.8% higher than Capital area. - Even Capital area which showed higher portion of Jeonse transaction, its Jeonse transaction in the first half of 2016 decreased to the similar level of 2013 s non-capital area, which indicate now the loan market of Capital area is not working with Jeonse as a center figure. 20 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

27 P A R T 1 Market Trends By Monthly Rent Types 2) The yearly increase of quasi-jeonse transactions compared to the previous year shows an increasing trend from 14,000 in 2014 to 22,000 in The increased quasi-monthly rent was 32,000 in 2014 compared to the previous year, but 23,000 cases increased in 2015 compared to the previous year. Capital area s increased volume of quasi-jeonse transaction was 11,000 in 2014 compared to the previous year and by 21,000 in 2015 compared to the previous year, which indicate that Capital area explains most of nationwide quasi-jeonse transaction and leads the transaction. In addition, the transaction volume of quasi-monthly rent increased by 22,000 in 2014 from the previous year by 14,000 in 2015, while the transaction volume of monthly rent marginally increased, indicate the obvious increasing trends of quasi-jeonse and quasimonthly rent in Capital area. The transaction volume of quasi-jeonse in non-capital area increased by just 4,000 in 2014 from the previous year and by 1,000 in 2015 while quasi-monthly rent consistently increases by 10,000 in the same periods, which indicate the increasing trends of monthly rent is nationwide scale phenomenon, but quasi-jeonse increases only in Capital area. Figure 1-22 Trends of monthly rent by regions (unit: 10,000) Nationwide Quasi-Jeonse Quasi-monthly rent Monthly rent Source: RTMS Capital area Quasi-Jeonse Quasi-monthly rent Monthly rent Non-Capital area Quasi-Jeonse Quasi-monthly rent Monthly rent 2) Monthly rent: deposit money is less than 12 months rent (deposit money is less than the 10% of Jeonse price) Quasi-monthly rent: somewhere between monthly rent and quasi-jeonse Quasi-Jeonse: deposit money exceeds 240 months rent (deposit money is more than the 60% of Jeonse price) 21

28 Jeonse by Price Range As Jeonse price consistently increases, the transaction volume of low price(100 million and under) and medium-low price(over 100 million under 200 million) decreases, but the transaction volume of medium-high price(200 million~400 million) and high price(over 400 million won) slightly increases. This change is remarkable in Capital area, In the first half of 2016(by the end of May), the transaction of Jeonse with 100 million won and under decreased to 37.6% among total Jeonse transaction compared to 2015 s 40.2% by 2.5%p and in the same periods, 100 to 200 million Jeonse decreased from 29.7% in 2015 to 28.1% by 1.6%p. On the contrary, higher price Jeonse slightly increased. In the first half of 2016(by the end of May), the transaction volume of 200 to 400 million Jeonse increased to 25.7% by 2.4%p from the previous year, and Jeonse with over 400 million increased to 8.6% by 1.7% compared to the previous year. For non-capital area, like Capital area, there was no significant change in the transaction volume of high and medium-high price Jeonse, and the transaction of low price Jeonse decreases while medium-low Jeonse consistently increases by showing the increased portion of 30.5% in 2016 compared to 2015(28.3%). Figure 1-23 Trends of Jeonse transaction volume by region and price Nationwide Capital area million and under 100 ~ 200 million 100 million and under 100 ~ 200 million 200 ~ 400 million over 400 million 200 ~ 400 million over 400 million Source: RTMS Non-Capital area (unit: 10,000) million and under 100 ~ 200 million 200 ~ 400 million over 400 million 22 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

29 P A R T 1 Market Trends Trends of Housing Supply Market 1) Trend of New Housing Supply Summary Because of the Capital area s strict loan approval imposed in 2016 February, housing transaction volume decreased. Because of the pressure from the record-breaking issues of permissions and licenses in 2015, construction companies adjust their businesses, showing the similar volume of commencement subdivision to previous year. Permissions and Licenses In the first half of 2016(May), the performance of permissions and licenses(275,000 units) is over the same period last year(227,000 units), but the performance in 2015 was not decent and the impact of sharp increase of permissions and licenses seems to still remain until Pre-sale and Commencement As if the impact above influenced, the volume of commencement and subdivision In the first half of 2016(May) is similar with the same period last year. The performance of commencement is 238,000 units and the supply of subdivision is 176,000 units. Completions In the first half of 2016(May) the volume of completion is greater than before, as the 2014 s volume of commencement(508,000 units) increased than 2013 s 40 Figure 1-24 Nationwide trends of housing supply (Jan~May accumulated yearly data) (unit: 10,000 units) `12 `13 `14 `15 `16 `12 `13 `14 `15 `16 `12 `13 `14 `15 `16 `12 `13 `14 `15 `16 `12 `13 `14 `15 `16 Permissions and licenses Commencement Pre-sale Completion Unclaimed Capital area Non-Capital area Note: yearly volume is accumulated by May (excluding unclaimed houses) Source: Ministry of Land, Infrastructure and Transport 23

30 commencement(429,000 units). Unclaimed Houses The volume of unclaimed houses in 2015 was 62,000 units, which increased compared to 2014, but this seems to be because of the concentrated supply of subdivision. In the first half of 2016(May), the unclaimed houses a little bit decreased to 55,000 units. Permissions and Licenses The volume of nationwide permissions and licenses by is 275,000 units that increased by 21.3% from the same period last year (227,000 units). By , Capital area(127,000 units) increased by 6.7%, five major Metropolitan cities (41,000 units) by 54.5%, provinces(107,000 units) by 31.8%, which indicate non-capital area s permissions and licenses lead nationwide permissions and licenses. - Daegu(9,600 units) and Gwangju(6,800 units) increased by 63.0% and 91.1%, respectively. By Sectors In , nationwide permissions and licenses by sectors showed the increased private sector s volume(270,000 units) by 25.1% and decreased public sector s(5,000 units) by 53.6%. By Sizes In every region and size, the volume of permissions and licenses increased, especially in five major Metropolitan cities showed 74.9% of increasing rate for the size of 60m²~85m². Pre-sale The nationwide subdivision permission volume of is 176,000 units 1.8% higher than the same period in 2015 (173,000 units). Capital area(80,000 units) decreased by 9.8%. Five major Metropolitan cities(27,000 units), provinces(69,000 units) increased by 27.3% and 9.6%, respectively. - Capital area showed decreased supply of subdivision, and Busan(10,000 units) and Daegu(7,500 units) 는 increased by 75.0% and 69.2%, respectively. Commencement By , the volume of nationwide housing commencement is 238,000 units, which increased from the same period of 2015(223,000 units) by 6.5%. 24 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

31 P A R T 1 Market Trends Capital area(110,000 units) decreased by 4.4%, five major Metropolitan cities(38,000 units) increased by 44.0%, and provinces(89,000 units) increased by 9.8%. - Seoul(27,000 units) increased by 7.5%, but Gyeonggi(78,000 units) and Incheon(46,000 units) decreased by 5.1% and 37.6%, respectively. By Sectors The volume of nationwide commencement in private sector(224,000 units) by increased by 8.5% compared to the same period last year, and in public sector(13,000 units) decreased by 18.5%. Table 1-7 Trends of housing supply by major regions (unit: 1,000 units) To longterm Category 1/4 1/4 2/4 3/4 4/4 계 By May By May(%) average Nationwide (21.3) 1.43 Capital area (6.7) 1.44 Permissions and Five major Metropolitan (54.5) 1.44 licenses cities Provinces (31.8) 1.42 Nationwide (1.8) 1.37 Capital area (-9.8) 1.44 Subdivision Commencement Completion Five major Metropolitan (27.3) 1.11 cities Provinces (9.6) 1.44 Nationwide (6.5) 1.32 Capital area (-4.4) 1.35 Five major Metropolitan (44.0) 1.31 cities Provinces (9.8) 1.28 Nationwide (26.8) 1.29 Capital area (45.4) 1.29 Five major Metropolitan (-2.1) 1.10 cities Provinces (20.8) 1.40 Note: the long-term average is the accumulated average from 2011 to 2016 including each year s period from January to May, value inside the bracket represent change rate from the last year. Source: Ministry of Land, Infrastructure and Transport 25

32 Table 1-8 Trends of housing supply in capital area and metropolis Region Seoul Incheon Gyeonggi Busan Daegu Gwangju Daejeon Ulsan 1/4, Accumulated value by May Permissions and licenses Pre-sale housing (unit: 1,000 units) By May By May 2/4 3/4 4/4 Total 1/4, Accumulated value by May To longterm average 1/4, Accumulated value by May (18.7) (-25.5) (5.9) (58.6) (63.0) (91.1) (-55.6) (119.5) /4 3/4 4/4 Total Region Commencement Completion Seoul Incheon Gyeonggi Busan Daegu Gwangju Daejeon Ulsan (7.5) (-37.6) (-5.1) (59.1) (14.6) (182.7) (-12.6) (10.5) To 1/4, longterm Accumulated value by May average (-2.3) (-43.9) (-8.3) 1.61 (75.0) 1.15 (69.2) 1.13 (25.8) (-64.7) (1.4) 1.30 (37.8) 1.26 (-25.5) 0.45 (59.9) 1.48 (-38.1) 0.55 (32.5) 1.79 (76.9) 1.66 (24.1) 0.97 (-56.4) 0.78 Note: the long-term average is the accumulated average from 2011 to 2016 including each year s period from January to May, value inside the bracket represent change rate from the last year. Source: Ministry of Land, Infrastructure and Transport 26 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

33 P A R T 1 Market Trends By Sizes While Capital area s volume of commencement for 85m²~135m² size increased by 14.6% compared to the same period last year, the size increased in nationwide scale by 33.8%, which is the highest increasing rate among medium-large sizes. Completion By , the performance of nationwide housing completion is 187,000 units, which increased by 26.8% compared to the same period last year (148,000 units). Capital area(92,000 units) increased by 45.4% and provinces(67,000 units) by 20.8%, but five major Metropolitan cities(28,000 units) decreased by 2.1%. - Seoul(34,000 units) and Gyeonggi(55,000 units) increased by 37.8% and 59.9%, respectively, leading the increase in the nationwide volume of completion. By sectors The volume of nationwide completion increased in private sector(151,000 units) by 19.1% and in public sector(36,000 units) by 73.5%. By sizes In the size of 40m² or less and the size of 80m²~135m², there were increases in all regions while showing the nationwide increasing rate of 72.3% and 30.5%, respectively. In Capital area, the completion volume increased with the order of 40m² or less and then 80m²~135m². 2) Trend of Unclaimed Houses Unclaimed Houses In the number of nationwide unclaimed houses is 55,000 units, which increased from the same period 2015(28,000 units) by 97.1%, but decreased from late 2015(62,000 units) by 9.7%. Compared to the same month last year, all of Capital area, five major Metropolitan cities, and provinces showed increase in the volume of unclaimed houses, and five major Metropolitan cities(21,000 units) showed the highest increasing rate of 303.2%. Given that Capital area decreased by 9,700 units, five major Metropolitan cities increased 100 units, provinces increased 3,600 compared to late 2015, Capital area and Busan, Daegu, Daejeon s unclaimed houses turned into decreasing trend, but Gwangju, Ulsan and provinces continue to show increasing unclaimed houses. 27

34 Table 1-9 Trend of unclaimed houses Region 1/4 May /4 3/4 4/4 1/4 (unit: 1,000 units) May(%) Nationwide (97.1) Capital area (44.7) Seoul (-48.1) Incheon (-70.3) Gyeonggi (65.2) Five major Metropolitan cities (303.2) Busan (50.1) Daegu (2883.7) Gwangju (774.2) Daejeon (88.0) Ulsan (1541.8) Provinces (133.1) Note: value inside the bracket represent change rate from the same month last year. Source: Ministry of Land, Infrastructure and Transport Table 1-10 Trend of unclaimed houses after completion Region 1/4 May /4 3/4 4/4 1/4 May(%) (unit: 1,000 units) Nationwide (-13.3) Capital area (-19.8) Seoul (4.0) Incheon (-68.6) Gyeonggi (-22.4) Five major Metropolitan cities (-16.6) Busan (-31.3) Daegu Gwangju (486.1) Daejeon (-50.2) Ulsan (-1.6) Provinces (3.2) Note: value inside the bracket represent change rate from the same month last yea Source: Ministry of Land, Infrastructure and Transport 28 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

35 P A R T 1 Market Trends By Sizes Unclaimed houses with 85m² or larger size decreased in Capital area and five major Metropolitan cities except for in provinces, the increase of unclaimed houses with 60m²~85m² size was considerable, leading the 735.6% of increase in five major Metropolitan cities. - Provinces unclaimed houses with 85m² and larger size increased by 9.4% compared to the same month last year. Unclaimed Houses after Completion The present figure of nationwide unclaimed houses after completion in is 10,800 units, which is a decrease of 13.3% compared to the same month 2015 (12,500units) Five major Metropolitan cities(700 units, -16.6%) and Capital area(6,600 units, -19.8%) decreased. Provinces(3,500 units, 3.2%) increased. For Capital area, Incheon and Gyeonggi decreased by 68.6% and 22.4%, respectively while Seoul increased by 4.0%. - Among five major Metropolitan cities, Gwangju is the only city showed the increase in the unclaimed houses of 211 units after completion, Daegu has no unclaimed house after competition from to the present. 29

36 Land Market Lee Seokhee Long-Term Trends of Nationwide 1) Trend of Land Values Index Trend of Land Value Land values index was somehow steady in 2012 and 2013 and gradually increases, but real land values index is overall in steadiness. Land values index recorded 95.2 in and showed steadiness * in 2012~2013, but land value has been increasing up to in , which is 5.3% increase from Real land value adjusted by consumer price index has been decreasing after while recording the lowest point of in But, after 2015, it shows consistent increasing pattern. ( =100) The real land value recently increased to in , which is the highest level in five years ( record is ), and increased by 1.27% compared to Figure 1-25 Land values index and land value change rate Figure 1-26 Land values index and realland values index (land values index : =100) Land value change rate Land values index Source: Ministry of Land, Infrastructure and Transport 0.3% 0.2% 0.1% 0.0% -0.1% (land values index : =100) (real land values index : =100) Real land values index Land values index Source: Ministry of Land, Infrastructure and Transport 30 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

37 P A R T 1 Market Trends Real Land Values Index by Use Zone After the financial crisis, the real land values index of commercial zone sharply decreased, and its recovery is also the slowest while residential zone shows the fastest recovery. The real land values index of commercial zone dropped with the highest gap and the recovery is the slowest *, which is derived from continuous economic downturn. * In , the index dropped with the largest extent from , and now records in while showing the slowest recovery. The real land values index of residential zone dropped with the second largest extent, and the recovery is the fastest since 2014 *. This seems because the housing price is somehow skyrocketing due to the low interest rate and the improved recognition about housing as the revenue model of real estate **. * In , the index dropped with the largest extent from , and now records in while showing the highest real land values index ** Due to low interest rate and so on, alternative investment market is now active, so that the recognition about housing as the revenue model of real estate is increased, accelerating the transition from Jeonse to monthly rent. The real land values index of administrative zone was in and showed steadiness by 2014, but increased faster than other zones such as residential, commercial, industrial, and green zones after 2015, recording in Figure 1-27 Real land values index of major districts ( 실질land values index : =100) Residential Commercial Administrative Source: Ministry of Land, Infrastructure and Transport ( 실질land values index : =100) Industrial Green 31

38 2) Trend of Land Transaction Volume Trend of Transaction Volume Land transaction volume (lot) shows the general pattern of increasing after 2011, provinces were the center figure of the transaction before 2013, and Capital area became the center of transaction after Land transaction volume (lot) increased at a glacial pace from 2013, but gradually decreased after (292,000 cases) and 252,000 transactions were reported in while continuing the steadiness in terms of area. Pure land transaction shows the steadiness both in lot and area for five years, and monthly average transaction is 150 km2 in terms of area. Provincial metropolises the portion of land transaction (lot) was 18~20% in 2011 to 2015, but the portion started plummeting after the late 2015, recording 15.4% in ,000 Figure 1-28 Land transaction volume (3 months moving average) Figure 1-29 Pure land transaction volume (3 months moving average) 200, , , , Land transaction(lot : case) Land transaction(area : 1,000m2 ) Source: Ministry of Land, Infrastructure and Transport Land transaction(lot : case) Land transaction(area : 1,000m2 ) Source: Ministry of Land, Infrastructure and Transport Figure 1-30 Portion of land transaction by regions (lot) 60% 40% 20% 0% Capital area Provincial metropolis Provinces Source: Ministry of Land, Infrastructure and Transport Figure 1-31 Portion of pure land transaction by regions (lot) 100% 80% 60% 40% 20% 0% Capital area Provincial metropolis Provinces Source: Ministry of Land, Infrastructure and Transport 32 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

39 P A R T 1 Market Trends Foreigners Land Transaction While there is the general increasing trend of foreigners land transaction (lot), the transaction volume in 2014 was almost double compared to 2010, especially Jeju shows the sharp increase in the volume. The volume of foreigners land transaction gradually increased after 2010, and sharply increased from 2014 in all regions in terms of lot *. Especially, Jeju has shown the consistent increase of foreigners land transaction after the introduction of investment immigration in 2010, the monthly average transaction volume in 2016 is 7 times more than Figure 1-32 Foreigners land transaction volume (lot) (unit: case) 2,000 1,500 1, Figure 1-33 Foreigners land transaction volume (area) (unit: 1,000m²) 2,000 1,500 1, Seoul IncheonㆍGyeonggi Provincial metropolis Provinces Source: Ministry of Land, Infrastructure and Transport Seoul IncheonㆍGyeonggi Provincial metropolis Provinces Source: Ministry of Land, Infrastructure and Transport Figure 1-34 Jeju Foreigners land transaction volume (lot) (unit: case) Pure land Improved property Note: by 3 months movement average(3ma) Source: Ministry of Land, Infrastructure and Transport Figure 1-35 Foreigners land transaction volume (area) (unit: 1,000m²) Pure land Improved property Note: by 3 months movement average(3ma) Source: Ministry of Land, Infrastructure and Transport 33

40 Trends of Land Market by Regions 1) Trend of Real Land Value Trend of Real Land Value Real land value decreased both in 2014 and 2015, but increased in the first half of 2016 (by the end of May) with a nationwide scale. Especially, the increase rate of land value is highest in Jeju. `For the real land value in the first half of 2016 (by the end of May), non-capital area shows higher increasing rate than Capital area, especially provincial metropolises show higher rate than provinces. * Capital area shows 0.2% (Incheon)~0.6% (Seoul), but provinces show 0.3% (Chungbuk)~ 4.8% (Jeju), and provincial지방 metropolises show (except for Sejong) 0.6% (Ulsan)~1.1% (Daegu). Sejong and Jeju have shown the increasing real land value for full three years. Figure 1-36 Land value change rate by si and do (unit: %) 2% 1% 0% -1% % 5% Nationwide Seoul Busan Daegu Incheon Gwangju Daejeon Ulsan Sejong `14(` ~ `14.5.) `15(` ~ `15.5.) `16(` ~ `16.5.) 4.8 4% 3% 2% 1% % -1% % Gyeonggi Gangwon Chungbuk Chungnam Jeonbuk Jeonnam Gyeongbuk Gyeongnam Jeju `14(` ~ `14.5.) `15(` ~ `15.5.) `16(` ~ `16.5.) Note: land value change rate represents the change rate between previous year s December to the target year s May. Source: Ministry of Land, Infrastructure and Transport 34 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

41 P A R T 1 Market Trends 2) By use Zone 3), Trend of Change Rate 4) Use Zone In the first half of 2016 (by the end of May) the increasing gap of real land by use zones grows bigger. Real land value by use zone decreased in 2014 or 2015 depending the different districts, but increased among all districts in Residential zone s real land value increased in nationwide scale during 2016, which is the highest rate of 0.69% among all districts. Commercial zone s 2016 real land value increased by 0.53%, provinces (0.87%) showed higher rate than Capital area (0.37%). Industrial zone increased by 0.3%, and the rates of Capital area, provinces, and metropolis are similar with each other. Administrative zone increased by 0.67%, metropolis showed the lowest increasing rate. Table 1-11 Real land value change rate by regions-districts (unit: %) Regions Residential zone Commercial zone Industrial zone Administrative zone Nationwide Metropolis Capital area Provinces Note: land value change rate represents the change rate between previous year s December to the target year s May Source: Ministry of Land, Infrastructure and Transport 3) Use district can be categorized as urban district, administrative district, agricultural district, and greenbelt district. Urban district can be sub-categorized with residential district, commercial district, industrial district, and green district. Administrative district can be subcategorized into administrative district, productive green district, and greenbelt district. 4) In this passage, the analysis on land values index trend includes urban district (residential, commercial, and industrial districts) without green district and administrative district. 35

42 By Si and Do In the first half of 2016 (by the end of May), the regions showing the very high increasing rate of real land value are Jeju, Sejong, and Daegu. For residential district, Jeju(4.82%), Daegu(1.42%), Sejong(1.34%), Daejeon(1.28%), Busan (1.21%), and Gangwon(1.10%) showed high rates, and Chungbuk(0.39%) and Incheon(0.32%) showed the lowest rates. For commercial district, Jeju(3.32%), Sejong(1.98%), Busan(1.63%), Daegu(0.93%), Daejeon(0.66%), and Ulsan(0.53%) showed high rates, and Chungbuk(-0.31%) showed decreased real land value. For industrial district, Jeju(1.59%), Daegu(0.98%), Gwangju(0.66%), Chungbuk(0.62%), and Incheon(0.44%) showed high rates, and Ulsan(-0.18%) and Jeonbuk(-0.22%) showed decreased real land value. For administrative district, Jeju(6.06%), Sejong(0.89%), Gyeongbuk(0.82%), and Ulsan(0.75%) showed high rates. Table 1-12 By si and douse district, real land value change rate (unit: %) Regions Residential district Commercial district Industrial district Administrative district Seoul Busan Daegu Incheon Gwangju Daejeon Ulsan Sejong Gyeonggi Gangwon Chungbuk Chungnam Jeonbuk Jeonnam Gyeongbuk Gyeongnam Jeju Note: land value change rate represents the change rate between previous year s December to the target year s May Source: Ministry of Land, Infrastructure and Transport 36 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

43 P A R T 1 Market Trends Daegu Among metropolises, Daegu showed the highest levels of increasing rate for the real land values of residential, industrial, and green district in the first half of 2016 (by the end of May). For the increasing rate of residential district land value in 2016, Daegu marked 1.42% as the second place after Jeju, which is the highest rate among metropolises. * Excluding Daegu, other metropolises increasing rates of land value for residential zone were distributed as 0.32% (Incheon) ~ 1.28% (Daejeon). The increasing rate of industrial district land value was 0.98%, which is the highest among metropolises. For commercial district(0.93%) and green district(1.23%), Daegu is also the highest metropolis. Ulsan In the first half of 2016 (by the end of May), Ulsan s the increasing rate of real land value shows mostly high level, but industrial district shows the lowest level among nationwide due to the economic downturn of the local businesses. Ulsan s the increasing rates of land value by districts in 2016 show 0.95% in residential district(7 th ), 0.53% in commercial district(6 th ), 0.59% in green district(9 th ), and 0.75% in administrative district(4 th ), which are quite high. The increasing rate of industrial district land value marked -0.18% that is the lowest among nationwide. This is derived from the economic downturn of the local businesses related to shipbuilding industry. Sejong The increasing rate of the real land value of Sejong is very high, and commercial ㆍ administrative districts ranked 2 nd place after Jeju. The increasing rates of the real land value of Sejong are 1.98% for commercial district and 0.89% for administrative district, which are the second place after Jeju. The increasing rate of residential district land value is 1.34%(3 rd ), industrial district is 0.40% (7 th ), and green district is 1.00%(3 rd ). 37

44 Figure 1-37 The land value change rate of major regions by district Nationwide Residential district 2% Seoul Residential district 2% 0.69% 1% 1% Administrative district 0.67% 0% -1% Commercial district 0.53% Administrative district 0% -1% Commercial district 0.48% 0.30% Green district Industrial district Green district Industrial district Busan Residential district 2% Daegu Residential district 2% 1% 1% Administrative district 0% -1% Commercial district Administrative district 0% -1% Commercial district Green district Industrial district Green district Industrial district Incheon Residential district 2% Gwangju Residential district 2% 1% 1% Administrative district 0% -1% Commercial district Administrative district 0% -1% Commercial district Green district Industrial district Green district Industrial district Residential district 2% 1% Residential district 2% 1% Administrative district 0% -1% Commercial district Administrative district 0% -1% Commercial district Green district Industrial district Green district Industrial district Sejong Residential district 4% Jeju Residential district 6% Administrative district 2% 0% -2% Commercial district Administrative district 4% 2% 0% -2% Commercial district Green district Industrial district Green district Industrial district 2014 (` ~`14.5.) Source: Ministry of Land, Infrastructure and Transport 2015 (14.12.~`15. 5.) 2016 (`15.12.~`16.5.) 38 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

45 P A R T 1 Market Trends Jeju Jeju records the highest increasing rates of land value in the all districts, and its increasing rates in the first half of 2016 (by the end of May) exceed the rates in the same period 2014 and Jeju is the only region showing recent three years (previous year s December to a focal year s May) real land value increases in residential district(0.54%, 0.71%, 4.82%), and 2016 s increasing gap is the largest. 3.32% of increasing rate for commercial district also dominates Sejong(1.98%). The rate of industrial district is 1.59% the highest in nationwide scale. * The increasing rates of Capital area land value are as low las 0.58% for residential district, 0.37% for commercial district, 0.28% for industrial district, and 0.20% for green district. The increasing rate of administrative district s land value is 6.06% that is six times more than Sejong in the second place(0.89%). Overall, Jeju has been consistently given development pressure * in every district to increase, and the increasing land value was accelerated by the announcement about the second airport **. * International tourism and foreign investment heading to Jeju, domestic demands for English learning village and innovation city brought consistent pressure for the development. ** After the announcement for the Jeju second airport in 2015 (` ), the land value increasing rate shows 0.94% to 2.09% per month, which is ten times higher than nationwide average (0.17% to 0.25%) Metropolis The land value increasing rates of Seoul and metropolitan cities in the first half of 2016 (by the end of May) show higher levels than nationwide in residentialㆍ commercialㆍ industrial districts s land value increasing rates are 0.78% for residential district, 0.65% for commercial district, 0.39% for industrial district, and 0.45% for green district, which are higher than nationwide average. * Capital area s land value increasing rates are 0.58% for residential district, 0.37% for commercial district, 0.28% for industrial district, and 0.20% for green district, which are relatively low. The increasing rate of administrative district s land value is 0.37% that is lower than nationwide average. 39

46 3) Trend of Land Transaction Volume by Regions 5) Land Transaction Volume 6) The volume of land transaction in the first half of 2016 (by the end of May) somehow decreased compared to the same period last year, but overall trend is increasing. The land transaction volume in Capital area, provinces, Seoul, Gyeonggi, provincial metropolises, and provincial dos decreased compared to the last year, but overall trend is increasing. Capital area s land transaction volume has consistently increased to 443,000 lots in 2016, and provinces also has increased to 702,000 lots. Seoul s transaction volume has been increased to 127,000 lots in Sejong s transaction volume considerably decreased to 13,000 lots compared to the same period last year (20,000 lots) Jeju s transaction volume has increased to 32,000 lots in 2016, which is the highest record. Figure 1-38 Accumulated land transaction volume between January and May by regions (unit: 1,000 lots) 1, Capital area Provinces 0 Seoul Gyeonggi Provincial metropolis Provincial dos Sejong Jeju (1.~5.) Note: focal year s accumulated volume from Jan to May transaction volume Source: Ministry of Land, Infrastructure and Transport 5) This chapter uses the criteria of lot for transaction volume. Lot unit is better than area unit in terms of practical aspect. 6) Land transaction volume includes land only transaction and landㆍstructure package transaction. 40 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

47 P A R T 1 Market Trends Pure Land 7) In the first half of 2016 (by the end of May), pure land transaction volume is in increasing trend for both Capital area and provinces. Compared to Capital area, provinces shows relatively low change rate in pure land transaction volume. Capital area s pure land transaction volume has been increasing to 7,000 lots for Seoul, 90,000 lots for Gyeonggi, and 106,000 lots for Capital area in Provinces pure land transaction volume increases with metropolises as the center rather than dos, while recording 39,000 lots for metropolises and 319,000 for do areas in 2016 Sejong s pure land transaction volume decreased to the lowest transaction volume (2,200 lots) in 2015, but sharply increased to 3,900 lots in Jeju s pure land transaction volume has been increasing to 21,000 lots in 2016, where is the only region showing the consistent increase among si and do areas. Figure 1-39 Accumulated pure land transaction volume between January to May by regions (unit: 1,000 lots) Capital area 0 Provinces 0 Seoul 0 Gyeonggi Provincial metropolis Provincial dos Sejong Jeju (1.~50) Note: focal year s accumulated volume from Jan to May transaction volume Source: Ministry of Land, Infrastructure and Transport 7) This is about land only transaction volume. 41

48 Trends of Land Value Related to Major Policies 1) KTX Station Influence Area Major KTX Station Influence Area KTX station influence area s land value increasing rate in the first half of 2016 (by the end of May) shows high level in station influence area with active development and newly established Honam Line. Gimcheon Gumi station(1.5%), Dong Daegu station(2.1%), and Singyeonju station(1.9%) show the higher rate of increasing land value than their mother cities thanks to the active development in the station influence areas. * Compared to other KTX station influence areas, the mother cities of Daegu Gyeongbuk in the station influence areas showed the higher increasing rate of land value, but these station influence areas showed even higher than the mother cities. ** Gimcheon Gumi station was influenced by the developing effect of Gyeongbuk innovation city, Dong Daegu station was by the construction of Shinsegae Department Store Honam Line KTX station influence area was affected by opening effect * for the station influence area to show higher increasing rate of land value than its mother city. * KTX Honam Line opened in , leading to expectation about developing potential and psychological effect. Figure 1-40 The land value change of major KTX station influence areas and mother cities rate in 2016 (unit: %) 3% 2% 1% % Seoul station Yongsan station Gwangmyeong ststion Cheonan Asan station Osong station Daejeon station Gimcheon Gumi station Dong Daegu station Singyeongju station Busan station Iksan station Jeongeup station Capital area Chungcheong Yeongnam Honam Note 1) KTX station influence area(radius of 1,000m) s land value change rate 2) Excluded station influence areas with small sample size KTX station influence area Mother city 3) Cheonan Asan station s mother city is Asan si, Gimcheon Gumi station s mother city is Gimcheon si 4) Period: ~ Source: KAB Gwangju Songjeong station 42 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

49 P A R T 1 Market Trends KTX Station Influence Area with Existing Railroad The land value change rate of regular KTX station influence areas using the existing railroads do not show significant differences with their mother cities in the first half of 2016 (by the end of May). The average land value increasing rate of KTX station influence areas with existing railroads is 0.9%, which is somehow lower than KTX station influence area(1.1%). Some stations like Naju station(2.5%), Gokseong station(1.7%), Changwon Jungang station (1.3%), Jinju station(1.3%), and Yeocheon station(1.2%) showed the higher land value increasing rate than their mother cities. * Naju station, Jinju station, and so on were affected by the development of influence area and innovation city, showing the higher rate of increasing real land value than their mother cities. Figure 1-41 The change rate of regular KTX station influence area and mother city in the first half of 2016 (by the end of May) (unit: %) 2% 1% 0% Yeongdeungpo station Suwon station Haengsin station Changwon station Changwon Jungang station Masan station Jinju station Miryang station Gupo station Capital area Busan Gyeongnam 3% 2.5 2% 1% 0% Seo Daejeon station Nonsan station Gyeryong station Jeonju station Namwon station Mokpo station Yeosu EXPO station Yeocheon station Suncheon station Naju station Gokseong station Chungcheong Honan KTX station influence area Mother city Note 1) KTX station influence area(radius of 1,000m) s land value change rate 2) Excluded station influence areas with small sample size 3) Cheonan Asan station s mother city is Asan si, Gimcheon Gumi station s mother city is Gimcheon si Source: KAB 43

50 2) Innovation City Innovation cities in all areas except for Daegu and Jeju show the somehow higher change rate of land value than the mother cities in Daegu innovation city recorded the 0.9% of land value increasing rate, which is lower than Daegu-si s 1.7% maybe because all the companies moving in the innovation city already completed the move-in in 2015, reducing the room for further increase. Jeju innovation city recorded the very high 4.7% of land value increasing rate, but the mother city, Seogwipo, showed even higher rate than the innovation city because of the second Jeju airport development and other positive factors. Innovation cities in all small and medium cities showed the higher increasing rate of land value than their mother cities, and especially the land values of Jeonbuk innovation city (Jeonju Wanju), Jeonnam innovation city (Naju), Gyeongnam innovation city (Jinju) increased by 1.7%, 3.1%, and 2.5%, respectively, which are the highest compared to other innovation cities in nationwide scale. - This may be because of the small economic size of their mother cities that enlarge the effect of innovation cities. Figure 1-42 The land value change rate of innovation city in the first half of 2016 (by the end of May) (unit: %) 6% % 3.1 2% % Busan Daegu Ulsan Gangwon (Wonju) Chungbuk (Jincheon, Eumseong) Jeonbuk (Jeonju, Wanju) Jeonnam (Naju) Gyeongbuk (Gimcheon) Gyeongnam (Jinju) Jeju (Seogwipo) Innovation city Mother city 1 Mother city 2 (Chungbuk: Eumseong-gun, Jeonbuk: Wanju-gun) Note 1) Replaced innovation city s name with regional name 2) Period : ~ Source: KAB 44 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

51 P A R T 1 Market Trends 3) Industrial Complex The increasing rate of land value in industrial complex in 2016 is higher in metropolis than do areas, but Ulsan shows the opposite pattern of decreasing land value. Ulsan s industrial complex is influenced by the economic downturn of major local industries like shipping building and heavy industry, so that it shows the lowest change rate of land value (0.0%) among nationwide with the largest difference to its mother city (1.0%). - The land value of Ulsan Dong-gu where Hyundai Heavy Industry has settled decreased in (-0.23%) for the first time after , and then decreased again in (-0.08%) Other metropolises like Daegu and Gwangju recorded 1.2% and 1.4%, respectively. - Compared to provincial do areas, it seems that metropolises render more demands for industrial complex. Among provincial do areas industrial complex, the western coastal zone such as Gyeonggi, Chungbuk, Chungnam, and Jeonbuk were relatively high in the increasing rate. - Gangwon, Gyeongbuk, and Gyeongnam in the eastern coastal zone showed 0.8%, 0.5%, and 0.5%, but Gyeonggi, Chungbuk, Chungnam, and Jeonbuk showed 0.6%, 1.4%, 0.7%, 0.7%. Figure 1-43 The land value change rate in the first half of 2016 (by the end of May) by si and do s industrial complex (unit: %) 2% % % Busan Daegu Gwangju Ulsan Gyeonggi Gangwon Chungbuk Chungnam Jeonbuk Jeonnam Gyeongbuk Gyeongnam Industrial complex Si and do with the industrial complex Note 1) industrial complex includes national, general, urban-it, agricultural complexes 2) Excluded regions without any industrial complex or with too small sample size. 3) Period: ~ Source: KAB 45

52 Commercial Real Estate Market Woo Namkyo Trends of Office Rent 1) Vacancy Rate and Rent The trend of office building rental market in 2016 Q1 showed some improvement after March but vacancy rate increased to 13.4% by 0.4%p compared to the previous quarter due to business slowdown. Actually contracted rent is 14,800 won per m², and the rent price index with which we can identify the trend of rent decreased by 0.1% compared to the previous quarter. Because of the business slowdown in 2016 early Q1, existing buildings vacancy increased to lead the small increase of vacancy rate in most regions, but the vacancy rate decreased in Incheon, Jeonnam and Jeju. Southeast zone (Busan, Ulsan, Gyeongnam) shows generally increasing vacancy rate due Table 1-13 Trend of office building vacancy and rent by regions (`16.1Q, change rate is compared to the previous quarter) Nationwide Seoul Busan Daegu Incheon Gwangju Daejeon Ulsan Vacancy rate(%) Rent (1,000/m²) Rent price index change rate(%) Gyeonggi Gangwon Chungbuk Chungnam Jeonbuk Jeonnam Gyeongbuk Gyeongnam Jeju 46 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

53 P A R T 1 Market Trends Figure 1-44 The change rate of rent and rent price index for office building by regions (compared to previous quarter) (unit : 1,000 won/m², compared to previous quarter %) Nationwide Seoul Busan Daegu Incheon Gwangju Daejeon Ulsan Gyeonggi Gangwon Chungbuk Chungnam Jeonbuk Jeonnam Gyeongbuk Gyeongnam Jeju -1.0 Rent(1,000 won/ m2 ) Rent price index change rate(%) Table 1-14 Trend of rent price index change rate for office building by regions. Region Trent of rent price index change rate (%) for office building by regions `14.1Q `14.2Q `14.3Q `14.4Q `15.1Q `15.2Q `15.3Q `15.4Q Index `16.1Q To previous quarter Nationwide Seoul Busan Daegu Incheon Gwangju Daejeon Ulsan Gyeonggi Gangwon Chungbuk Chungnam Jeonbuk Jeonnam Gyeongbuk Gyeongnam Jeju Note: index is based on Q(=100), negative(-) change is marked as red font. 47

54 to the slowdown of shipbuilding and other manufacturing industries, but Gyeonggi is able to maintain the lowest vacancy rate (5.3%) in nationwide scale owing to the move-in of IT companies to Pangyo, the headquarter of Samsung Electronics to Suwon (`16.3). From March, some of economic indicators are optimistic, but enterprise business shows downward inelasticity to maintain the decreasing trend of rent with the reduced rent demand. The level of rent is higher in Capital area like Seoul and Gyeonggi with more demands, the rent price index decreases in most areas. Seoul showed lower vacancy rate and higher rent than nationwide average. CBD Seoul station and Chungmuro are in CBD lead to increasing the vacancy rate overall, 10.9% by 0.3%p compared to the previous quarter, and especially the vacancy rate of smallmedium office buildings was 13.8% that is higher than other areas. However, the rent in CBD marginally increased due to the higher preference by tenants, recording the most expensive rent (24,500 won/m²). Particularly, large office building s rent was the highest as 29,400 won /m². Gangnam Area Because of the consistent decrease in rent, the average rent in Gangnam area was 21,200 won/m², and the vacancy rate decreased to 10.4% by 1.1%p compared to the previous quarter. For large offices, Samsung Group s finance related subsidiaries moved to Gangnam in a large scale while resolving the vacancy rate, so that Gangnam showed the lowest vacancy rate as 7.1%. Yeouido Mapo Area Since government institutions moved out to provinces (`16.2. National Health Insurance Service and Trust Guarantee Funds) as well as stock firms, the vacancy rate of large office increase to as high as 13.7% and the vacancy rate of small-medium office showed 6.4% as the lowest while total rent marginally increases to 18,500 won/m². Other Areas Though Jangan-dong area s vacancy was partially resolved, the vacancy of Mokdong and Hongdae-Hapjeong increased, so that the vacancy rate of other areas increased to 9.5% by 1.2%p compared to the previous quarter. The rent of other areas (14,100 won/m²) is lower than the average of overall Seoul area while showing steadiness. Table 1-15 Office building vacancy rate, rent, and rent price index by in Seoul 48 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

55 P A R T 1 Market Trends large Vacancy rate(%) Rent(1,000 won/m²) Rent price index total large smallmedium smallmedium total index To previous quarter(%) Seoul CBD Gangnam Yeouido Mapo Other areas Note 1) rent price index based on `15.Q4 (=100) 2) size based on: large = total floor area 33,058m² or larger / small-medium = under 33,058m² 2) Return on Investment (ROI) Due to the continuous freeze of low interest rate, investment demand for office increased, to that asset value continued to increase. However, the increasing trend slowed down in 2016 and ROI decreasd to 1.51% by 0.09%p compared to the previous quarter. Seoul(1.64%) and Gyeonggi(1.87%) can secure stable income from rent given the low vacancy rate, Jeju(2.80%) shows relatively high ROI owing to the economic boom based on the expectation about the second Jeju airport construction plan, tourism, and related service business. Busan maintains decent ROI (1.68%) due to the good condition of real estate market, but the increasing gap reduces due to the slowdown of local economy. Chungbuk showed the lowest ROI (0.64%) Table 1-16 ROI of office building by regions (unit: %) Nationwide Seoul Busan Daegu Incheon Gwangju Daejeon Ulsan Gyeonggi Gangwon Chungbuk Chungnam Jeonbuk Jeonnam Gyeongbuk Gyeongnam Jeju Income rate Capital return ROI

56 Figure 1-45 ROI of office building by regions (unit: %) Nationwide Seoul Busan Daegu Incheon Gwangju Daejeon Ulsan Gyeonggi Gangwon Chungbuk Chungnam Jeonbuk Jeonnam Gyeongbuk Gyeongnam Jeju Income rate Capital return ROI Seoul Due to the influence of relatively low vacancy rate and consistent increase in asset value, Seoul s ROI is 1.64% that is higher than nationwide average. CBD Jongno area (2.05%) shows the highest ROI of 1.78% compared to Seoul s four major areas. Gangnam Area The ROI of this area decreased to 1.51% (similar with nationwide average) by 0.08%p compared to the previous quarter as this area s rent decreased and the increasing gap of asset values reduced. Yeouido Mapo Area By the influence of consistent rent demand for the available offices in Yeouido and Yeongdeungpo area, this area s ROI (1.72%) is the second highest among Seoul s major areas. Other Areas These areas ROI (1.46%) was the lowest among Seoul s major areas and lower than nationwide average, which decreased by 0.12%p compared to the previous quarter nationwide. Table 1-17 ROI of office building in Seouls (unit: %) Nationwide Seoul CBD Gangnam Yeouido Mapo Others Income rate Capital return ROI Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

57 P A R T 1 Market Trends Long-term Trend The nationwide annual ROI of office building by 2016 Q1 (`15.2Q~`16.1Q) is 5.98% that is higher than any other investment goods *, and the three-year average ROI is 5.70%. * Bond Treasury bond (3-year) 1.455%, corporate bond (3-year, AA-) 1.910%, Financial Product Savings 1.64%, CD interest (91-day) 1.58% (Bank of Korea, by ) Seoul(6.70%), Busan(6.40%), and Gyeonggi(6.75%) showed higher ROI than nationwide average(5.98%), and especially Jeju(8.18%) showed the highest annual ROI because of the local economic boom. On the contrary, Ulsan shows the declining trend of annual ROI (compared to 2014, ROI decreased by 1.48%p in 2015) due to the recession of local economy with shipbuilding and manufacturing industries. The average annual ROIs of recent three years are in the order of Seoul(6.59%), Busan (6.28%), and Gyeonggi(5.81%) with showing higher values than average, Jeju continues the increasing trend (for recent three year, increased by 2.48%p), and Chungbuk showed the lowest ROI of 1.79%. Seoul s four major areas shows the marginal decrease of annual ROI, but still high ROIs (CBD 7.35%, Gangnam area 6.14%, Yeouido Mapo area 7.20%, and other areas 5.94%). Especially, CBD and Yeouido Mapo area showed the highest ROI of three years average among nationwide by showing 7.20% and 7.11%, respectively. Figure 1-46 Annual trend of ROI for office building by regions (unit: %) Nationwide Seoul Busan Daegu Incheon Gwangju Daejeon Ulsan Gyeonggi Gangwon Chungbuk Q Chungnam Jeonbuk Jeonnam Gyeongbuk Gyeongnam Jeju 51

58 Table 1-18 Trend of annual ROI by regions Regions Change trend of office building annual ROI(%) Recent 3-year Q average* Nationwide Seoul CBD Gangnam area Yeouido Mapo area Other areas Busan Daegu Incheon Gwangju Daejeon Ulsan Gyeonggi Gangwon Chungbuk Chungnam Jeonbuk Jeonnam Gyeongbuk Gyeongnam Jeju Note: annual ROI =, where is quarter ROI. For recent 3-year average is calculated by arithmetical mean based on the annual ROI. Trends of Retail Rent 1) Vacancy Rate and Rent In general, the vacancy of retail as commercial property in 2016 Q1 slightly increased due to the economic slowdown. However, rent marginally increased in some regions. Rent was the highest in medium-large retail (31,100 won/m²) while retail in aggregate building (28,800 won/m²) and small size retail (16,500 won/m²) followed. The rent price index to identify the change in rent increased by 0.2% in medium-large retail, but retail in aggregate building showed steadiness compared to the previous quarter. 52 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

59 P A R T 1 Market Trends Medium-large Retail While most regions vacancy rates increased, some regions (Daegu, Gwangju, Gangwon, and Jeju) showed the decreased vacancy rate. The nationwide vacancy rate increased to10.6% by 0.3%p compared to the previous quarter. Rent was usually high in Capital area with the high land value and more floating population, and there was the increasing or steady trend of rent in most regions, but Ulsan and Gyeongbuk s rent slightly decreased. For Ulsan, the slump of local business like shipbuilding influenced adjacent areas, so that the vacancy usually increased to 12.7% (by 1.7%p). Rent marginally increased in Seoul(Gwanghwamun, Jongno, Konkuk University), Busan (Jung-gu market), and Daegu(Keimyung University, Beomeo) where are constantly floating population while Incheon(Bupyeong) and Ulsan(Jeonha-dong) showed increased vacancy and decreased rent. Small Size Retail In most regions, vacancy rate increased, but Busan and Sejong s rate slightly decreased. Nationwide vacancy rate increased to 5.3% by 0.3%p compared to the previous quarter, and rent increased in Incheon, Daejeon, and Sejong while decreasing in Gyeongbuk and Gyeongnam. Vacancy rate a little bit increased in Gangwon(Chuncheon), Gyeongbuk(Gumi), and Gyeongnam(Geoje) compared to the previous quarter. Rent slightly increased in Seoul(Sinchon) and Daejeon(Seo Daejeon Crossroads) where are stable rent demands or Incheon(Sinpo-dong) where vacancy reduced, but rent somehow decreased in Gyeongbuk(Pohang) and Gyeongnam(Changwon-si Masan Dongseo-dong, Hwalcheon-dong) due to the contraction of local trade areas. Retail in Aggregate Building Rent in 2016 Q1 was high in metropolises like Seoul and Busan, and increased in Jeju and Jeonbuk while decreasing in Sejong and Ulsan. Seoul shows overall steadiness, but the rent slightly increased in trade areas having floating population and new rent demands, like Konkuk University, Bulgwang station, and Sadang. The rent marginally increased in Jeju due to the boom of tourism and active areas. Sejong s rent is under the process of correction because the initial fee for subdivision was too expensive. 53

60 Table 1-19 Retail vacancy rate by regions (unit: %) medium -large retail small size retail Nationwide Seoul Busan Daegu Incheon Gwangju Daejeon Ulsan Sejong Gyeonggi Gangwon Chungbuk Chungnam Jeonbuk Jeonnam Gyeongbuk Gyeongnam Jeju Note: I did not estimate vacancy rate because only some retail in aggregate building were surveyed Table 1-20 Rent (1,000 won /m²) and rent price index change rate (B, %) of retail by regions medium -large Nationwide Seoul Busan Daegu Incheon Gwangju Daejeon Ulsan Sejong A B small size A Retail in aggregate building A B Gyeonggi Gangwon Chungbuk Chungnam Jeonbuk Jeonnam Gyeongbuk Gyeongnam Jeju Note 1) The rent price index of small size retail was not estimated due to unavailability of longitudinal data for it. 2) Rent price index based on `15. 4Q (=100) Table 1-21 Retail vacancy rate, rent, and rent price index in Seoul medium -large retail small size retail Retail in aggregate building Seoul CBD Gangnam Sinchon Mapo Other areas vacancy rate(%) Rent(1,000 won/m²) Rent price index change rate(%) vacancy rate(%) Rent(1,000 won /m²) Rent(1,000 won /m²) Rent price index change rate(%) Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

61 P A R T 1 Market Trends Figure 1-47 Retail rent by regions (unit: 1,000 won/m²) Nationwide Seoul Busan Daegu Incheon Gwangju Daejeon Ulsan Sejong Gyeonggi Gangwon Chungbuk Chungnam Medium-large retail store Small size retail store Retail in aggregate building Jeonbuk Jeonnam Gyeongbuk Gyeongnam Jeju Table 1-22 Trend of medium-large retail prices rent price index compared to the previous quarter change rate Regions Trend of medium-large retail prices rent price index compared to the previous quarter change rate(%) `16.1Q `14.1Q `14.2Q `14.3Q `14.4Q `15.1Q `15.2Q `15.3Q `15.4Q 지수전기대비 Nationwide Seoul CBD Gangnam Sinchon Mapo Other areas Busan Daegu Incheon Gwangju Daejeon Ulsan Gyeonggi Gangwon Chungbuk Chungnam Jeonbuk Jeonnam Gyeongbuk Gyeongnam Jeju Note: rent price index is based on `15.4Q (=100), negative (-) value is marked as red font. 55

62 Table 1-23 Trend of retail in aggregate building s rent price index compared to the previous quarter change rate Region Trend of retail in aggregate building s rent price index compared to the previous quarter change rate(%) `14.2Q `14.3Q `14.4Q `15.1Q `15.2Q `15.3Q `15.4Q Index `16.1Q To last quarter Nationwide Seoul CBD Gangnam Sinchon Mapo Other areas Busan Daegu Incheon Gwangju Daejeon Ulsan Sejong Gyeonggi Gangwon Chungbuk Chungnam Jeonbuk Jeonnam Gyeongbuk Gyeongnam Jeju Note: negative (-) value is marked as red font. 2) ROI The ROI of medium-large retail in 2016 Q1 is 1.62% (decreased by 0.09%p from the previous quarter), ROI for small size retail is 1.52% (decreased by 0.14%p), and for retail in aggregate building 1.96% (increased by 0.14%p compared to the previous quarter). Income rate from rent for 3-month is 1.21% for medium-large retail, 1.06% for small size retail, and 1.34% for retail in aggregate building, which are not different from the previous quarter in terms of rent and operational cost. Medium-large and small size retails show increasing asset values based on constant 56 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

63 P A R T 1 Market Trends demand and low interest rate, but the increasing rate slows down somehow. Retail in aggregate building s increasing trend in asset value is enhanced compared to the previous quarter as individual investments continue. Medium-large Retail In 2016 Q1, the ROIs of medium-large retail were higher in Jeju, Busan, and Daegu than nationwide average (over 2%), but lower in Daejeon, Gangwon, and Chungbuk. Seoul (Gwanghwamun, Jongno, Hongik University-Hapjeong, and Itaewon), Busan (Haeundae), and Daegu (Suseong, Beomeo) where trade areas are vitalized showed high ROIs while Daejeon (original downtown), Gangwon (Chuncheon) and Chungbuk (Cheongju) showed low earning rates due to the deterioration of existing market areas. Table 1-24 ROI of medium-large retail by regions (unit: %) Nationwide Seoul Busan Daegu Incheon Gwangju Daejeon Ulsan Gyeonggi Gangwon Chungbuk Chungnam Jeonbuk Jeonnam Gyeongbuk Gyeongnam Jeju income rate Capital return ROI Figure 1-48 ROI of medium-large retail by regions (unit: %) Nationwide Seoul Busan Daegu Incheon Gwangju Daejeon Ulsan Gyeonggi Gangwon Chungbuk Chungnam Jeonbuk Jeonnam Gyeongbuk Gyeongnam Jeju Income rate Capital return ROI 57

64 Small Size Retail In 2016 Q1, the ROIs of Jeju and Busan s small size retail recorded around 2%, but Gangwon and Chungbuk s ROIs were the lowest. For Seoul, Hongik University-Hapjeong showed relatively high ROI based on ample floating population, but Chungmuro and Cheongnyangni showed very low ROIs with around 1%. Jeju continuously showed high earning rate due to the vitalized local businesses by tourism, but now the increasing asset value seems to be in the process of correction. Table 1-25 ROI of small size retail by regions (unit: %) Nationwide Seoul Busan Daegu Incheon Gwangju Daejeon Ulsan Sejong Gyeonggi Gangwon Chungbuk Chungnam Jeonbuk Jeonnam Gyeongbuk Gyeongnam Jeju Income rate Capital return ROI Figure 1-49 ROI of small size retail by regions (unit: %) Nationwide Seoul Busan Daegu Incheon Gwangju Daejeon Ulsan Sejong Gyeonggi Gangwon Chungbuk Income rate Capital return ROI Chungnam Jeonbuk Jeonnam Gyeongbuk Gyeongnam Jeju Retail in Aggregate Building The 2016 Q1 ROIs of retail in aggregate building in Jeju, Seoul, Busan, Daegu, Gwangju, and Gyeongnam were over 2%, but low in Sejong, Chungbuk, and Jeonnam. 58 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

65 P A R T 1 Market Trends For Seoul, CBD (Seoul Station) and Sinchon area (Sinchon, Hongik University-Hapjeong) showed high ROI, but Gangnam area showed relatively poor ROI. Table 1-26 ROI of retail in aggregate building by regions (unit: %) Income rate Capital return Nationwide Seoul Busan Daegu Incheon Gwangju Daejeon Ulsan Sejong ROI Gyeonggi Gangwon Chungbuk Chungnam Jeonbuk Jeonnam Gyeongbuk Gyeongnam Jeju Figure 1-50 ROI of retail in aggregate building by regions (unit: %) Income rate Capital return ROI Nationwide Seoul Busan Daegu Incheon Gwangju Daejeon Ulsan Sejong Gyeonggi Gangwon Chungbuk Chungnam Jeonbuk Jeonnam Gyeongbuk Gyeongnam Jeju Table 1-27 Retail ROI by Seoul s major trade areas Medium -large retail small size retail Retail in aggregate building Nationwide Seoul CBD Gangnam Sinchon Mapo Other areas income rate Capital return ROI income rate Capital return ROI income rate Capital return ROI (unit: %) 59

66 Long-term Trend The annual (`15.2Q~`16.1Q) ROI of retail showed high numbers such as 6.37% for medium-large retail and 6.04% for small size retail based on continuous low interest rate and increased investment and attention to retail buildings. Especially, retail in aggregate building that is easy for individuals to invest showed the highest ROI of 7.18%. Annual ROI of retail in Metropolitan cities excluding Seoul, Gyeonggi, and Daejeon exceeded national average, Jeju showed the highest ROIs in all retail types thanks to domestic and international tourism as well as the vitalized local trade areas. On the contrary, Daejeon, Gangwon, and Chungbuk areas shoed lower earning rate than national average due to the downturn of local businesses and the lagged development of market areas. Among Seoul s four major areas, Sinchon Mapo showed the highest annual ROI like 7.65% for medium-large retail, 7.44% for small size retail, and 8.79% for retail in aggregate building by the influence of vitalized trade areas and ample floating population, which are exceeding nationwide average. Figure 1-51 Annual ROI of retail by regions (unit: %) Nationwide Seoul Busan Daegu Incheon Gwangju Daejeon Ulsan Sejong Gyeonggi Gangwon Chungbuk Chungnam Medium-large retail store Small size retail store Retail in aggregate building Note: the annual ROI is based on Q(`15.2Q ~ `16.1Q) Jeonbuk Jeonnam Gyeongbuk Gyeongnam Jeju 60 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

67 P A R T 1 Market Trends Table 1-28 Annual ROI of retail by regions Regions Annual ROI is based on Q(%) Medium-large retail Small size retail Retail in aggregate building Nationwide Seoul CBD Gangnam area Sinchon Mapo area Other areas Busan Daegu Incheon Gwangju Daejeon Ulsan Sejong Gyeonggi Gangwon Chungbuk Chungnam Jeonbuk Jeonnam Gyeongbuk Gyeongnam Jeju Note: annual ROI =, where is quarter ROI 61

68 Trends of Commercial Property Transaction and Supply 1) Office Sale Transaction 8) Nationwide In 2016 Q1, the number of office sale transaction sale was 138, which decreased by 22.9% from the previous quarter, but increased by 39.4% from the same period last year. Office sale transaction showed the highest frequency of 180 cases in 2015 Q3, and then started to decrease. The sale transaction volume of Metropolitan cities and provinces that showed relatively high volume also slowed down because of the influences like the governmental institutions completion of moving. Compared to the same period last year, the sale transaction volume increased in Capital area by 2.2%, in Metropolitan city and in provinces by 69.0% and 72.0%, respectively, which are very high. Figure 1-52 Trend of office sale transaction volume (building) `13.1Q `13.2Q `13.3Q `13.4Q `14.1Q `14.2Q `14.3Q `14.4Q `15.1Q `15.2Q `15.3Q `15.4Q `16.1Q Capital area Metropolitan city Provinces Nationwide 8) In , the transactions by was counted for general building, business facility (by the major use defined in Building Construction Ordinance. But, public office building and officetel were excluded). Real transaction data (sale transaction) based on contract date. The actual value can be changed by the future collection of new transaction data. 62 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

69 P A R T 1 Market Trends 2) Trend of Office Supply 9) Nationwide In , the total stock of office is 20,933 buildings, and in2016 Q1, the size of completed area was 403,009m² (78 units), which decreased by 26.4% (40.9% ) compared to the previous quarter as well as by 9.5% (13.3% ) to the same period last year. The completion volume of office building in 2014 Q4 was the highest as 132 buildings (547,832m²), and the new completion volume in provinces increases relatively faster than Capital area. However, the completion volume of office building in 2016 Q1 decreased overall as Capital area decreased by 14.6%, Metropolitan cities by 13.3%, provinces by as much as 60.5%. Building Figure 1-53 Trend of office completion `13.1Q `13.2Q `13.3Q `13.4Q `14.1Q `14.2Q `14.3Q `14.4Q `15.1Q `15.2Q `15.3Q `15.4Q `16.1Q Capital area Metropolitan city Provinces Nationwide Area(m²) 900, , , , , , , , , , , , , , , , , , , , , ,424 `13.1Q `13.2Q `13.3Q `13.4Q `14.1Q `14.2Q `14.3Q `14.4Q `15.1Q `15.2Q `15.3Q `15.4Q `16.1Q Capital area Metropolitan city Provinces Nationwide 9) based on general building management ledger in (public office building and officetel were excluded) 63

70 Compared to the same period last year, Capital area s completion volume of office building increased by 52.2%, but Metropolitan cities volume decreased by 31.6% and province are by 37.5%. 3) Sale Transaction of Retail 10) Nationwide The sale transaction volume of retail in 2016 Q1 is 6,426 cases, which decreased by 14.6% from previous quarter and by 13.7% from the same period last year. The sale transaction of retail in 2015 Q2 marked 8,239 cases, which is the highest record, and then has been decreasing by 17.1% in Capital area, 19.8% in Metropolitan cities, and 9.1% in provinces until 2016 Q1. Compared to the same period last year, sale transaction volume of retail increased a little bit in Capital area by 1.3%, but decreased in Metropolitan cities by 30.4% and in provincial do areas by 14.2%. Figure 1-54 Trend of retail sale transaction volume (building) 9,000 8,239 8,000 7,000 6,555 6,074 6,138 6,689 6,952 7,439 7,448 7,505 7,520 6,426 6,000 5,185 5,311 5,000 4,000 3,000 2,000 1,000 0 `13.1Q `13.2Q `13.3Q `13.4Q `14.1Q `14.2Q `14.3Q `14.4Q `15.1Q `15.2Q `15.3Q `15.4Q `16.1Q Capital area Metropolitan city Provinces Nationwide 10) In , the transactions by was counted for general building, retail (by the major use defined in Building Construction Ordinance, neighborhood living facility type 1 and 2, sales facility, recreational facility, and so on). Real transaction data (sale transaction) based on contract date. The actual value can be changed by the future collection of new transaction data. 64 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

71 P A R T 1 Market Trends 4) Trend of Retail Supply 11) Nationwide By , the total stock of retail marked 1,071,159 buildings and the size of completed area in 2016 Q1 was 2,580,524m² (6,567units) that decreased by 16.5% (22.7% ) compared to the previous quarter and by 3.6% (8.2% ) compared to the same period last year. The completion volume of retail building in 2015 Q4 was 8,490 units (3,088,588m²) as the highest record. Building Figure 1-55 Trend of retail completion 10,000 8,000 6,000 5,244 6,417 6,802 7,706 6,012 6,310 7,375 8,009 6,071 6,831 7,810 8,490 6,567 4,000 2,000 0 `13.1Q `13.2Q `13.3Q `13.4Q `14.1Q `14.2Q `14.3Q `14.4Q `15.1Q `15.2Q `15.3Q `15.4Q `16.1Q Capital area Metropolitan city Provinces Nationwide Area(m²) 3,500,000 3,000,000 2,500,000 2,000,000 3,111,572 3,229,628 3,009,283 3,226,986 3,088,588 2,773,488 2,818,386 2,675,899 2,580,524 2,432,782 2,385,858 2,386,642 1,966,435 1,500,000 1,000, ,000 0 `13.1Q `13.2Q `13.3Q `13.4Q `14.1Q `14.2Q `14.3Q `14.4Q `15.1Q `15.2Q `15.3Q `15.4Q `16.1Q Capital area Metropolitan city Provinces Nationwide 11) based on general building management ledger in

72 But, the completion volume of retail building in 2016 Q1 generally decreased while decreasing by 22.3% in Capital area, by 20.2% in Metropolitan cities, and by 23.5% in provinces. Compared to the same period last year, the completion volume of retail building increased by 27.6% in Capital area and by 4.8% in provinces while decreasing by 11.7% in Metropolitan cities. 66 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

73 Korea Real Estate Market Report P A R T 2 Real Estate Market Outlook in the Second Half of 2016 Classification Changes in housing sales price (nationwide) (Metropolitan area /Local provines) Changes in housing Jeonse price (nationwide) (Metropolitan area /Local provines) Changes in housing trading volumes (Nationwide) Trend Outlook `15 First half of `16 Second half of `16 `16 3.5% (4.4%/2.7%) 4.8% (7.1%/2.8%) 19% 1,194 thousand 0.1% (0.3%/0.0%) 0.7% (1.1%/0.3%) -25% 375 thousand 0.3% (0.5%/-0.2%) 0.5% (1.3%/0.0%) -23% 535 thousand 0.4% (0.8%/-0.2%) 1.2% (2.2%/0.4%) -24% 908 thousand

74 Real Estate Market Outlook in the Second Half of 2016 Lee Jiyeon, Shin Ranhee The housing market of South Korea is expected to experience purchase psychological shrinkage/atrophy for a short-term in the second half of 2016 because of Brexit (EU withdrawal of United Kingdom). Housing price will be stable as the housing market is reorganized by actual demand and the low-interest rate persists such as the record low prime rate (June: 1.5% 1.25%) another drop in a year. The lease market will not increase in a large magnitude due to stable new supply and sales market. However, some local markets, where supply and demand imbalance, will lead the increase in the leasing market. Housing Sales Market People in actual housing demand continue to take a wait-and-see attitude owing to the current negative effects (e.g., increase domestic market uncertainty caused by the Brexit, stronger loan regulations, and weakened domestic real economy). There is a possibility to have a temporary sales slump. On the other hand, the low-interest rate owing to the decreased prime rate and higher liquidity policy will generate sales mainly by people in actual housing demand. The sales market is expected to have a stable price. The sales polarization between the capital area and the other regions will continue in the second half following the first half. The capital area will continue a good market condition owing to the Gangnam reconstruction market. However, there can be a temporary regulation stage due to Brexit and reconstruction market regulation strengthening of the government. However, the impact will not be big. Decreased prime rate and expanded liquidity will continue sales 68 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

75 P A R T 2 Real Estate Market Outlook in the Second Half of 2016 oriented by the actual housing demand. Market condition will be different by region depending on favorable factors for development and the supply status. Due to the new supply and reinforced credit review (May), the sales market will continue to experience a regulation stage. Housing Leasing Market Due to decreased prime rate, the transition from Jeonse (full deposit with no month rent leasing form) to monthly rent will be accelerated. Jeonse market will continue an upward trend mainly for local areas with supply and demand imbalance. However, it is not expected to have a large increase because of the increase in new supply and the stable housing sales market. Gangnam redevelopment-reconstruction project becomes serious this year and there will be higher transfer demand. Therefore, areas adjacent to Gangnam will have a high price increase. Housing Trading Market As the housing market entered into a regulatory stage since the end of last year, the trading volume significantly decreased in the first half of this year compared to last year. Credit review was reinforced in local regions (May) additional to the capital area. The trading volume will be smaller than last year. However, purchase psychology will be recovered owing to the decreased prime rate. Housing Supply Market This year s expected supply quality is 617 thousand houses and the supply will increase for 2-3 years. Risk Factors Risk factors are reinforced credit review, increased housing supply, and higher economic uncertainty. The domestic economic growth rate of the year is expected to be mid 2%. The domestic economic slump will continue and the shipbuilding industry and the shipping industry are restructured. Consequently, the domestic economic status is unstable. The uncertainty of international macroeconomics (e.g., world economic recession started from the Europe) can act as a risk factor for the housing market in the second half of the year. Regulations on the housing collateral loan review was expanded to local regions (May) following the capital region. It can act as a negative factor in the housing market in the second half of the year. 69

76 Table 2-1 Summary of changes in the housing market during the first half of 2016 and the housing market outlook for 2016 Classification Changes in housing Sales Price(nationwide) (Metropolitan area /Local provines) Changes in Jeonse price (nationwide) (Metropolitan area /Local provines) Change in the housing trading volume (Nationwide) Trend Outlook 2015 First half of 2016 Second half of % (4.4%/2.7%) 4.8% (7.1%/2.8%) 19% thousand 0.1% (0.3%/0.0%) 0.7% (1.1%/0.3%) -25% 37.5 thousand 0.3% (0.5%/-0.2%) 0.5% (1.3%/0.0%) -23% 53.5 thousand 0.4% (0.8%/-0.2%) 1.2% (2.2%/0.4%) -24% 90.8 thousand Note: Housing trading volume used the data accumulated by May 2016 because the volume of the June is not available yet. The outlook for the 2016 housing market was estimated by using a quantitative method, which evaluated a metric model multidimensionally. A model included assumptions based on real estate policy and domestic and foreign economic outlook. It was conservatively set up with considering the possibility of international economy deterioration (e.g., Brexit and persisting economic uncertainties) based on the predicted value and the assumption that the housing market and macroeconomic variables were intercorrelated. The estimation projects that the nationwide housing sales price will increase 0.3% (capital area 0.5% and region -0.2%) and Jeonse price will rise 0.5% (capital area 1.3% and region 0%). The nationwide housing sales price of 2016 with including the second half projection will be 0.4% (capital area 0.8% and region -0.2%) higher than that of Jeonse price is expected to increase by 1.2% (capital area 2.2% and region 0.4%). The housing policy trend of the government including the recently announced 5.31 real estate policy (2016 housing total plan) focuses on the people s economy and housing stabilization. The future countermeasures are also expected to focus on the real estate market stabilization. 70 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

77 P A R T 2 Real Estate Market Outlook in the Second Half of 2016 Therefore, the housing sales and the Jeonse market are expected to maintain a stable trend. The housing sales volume between 2016 Jan and May was 375 thousand, which was 25% decrease compared to the same during of the last year. The business took a downturn. That of the second half of 2016 (2016 Jun~Dec) is expected to continue the market trend of the first half and decreases by 23% (908 thousand). The housing sales volume 2016 will be 908 thousand (-24%). Housing price increased above 3% in 2015 and recorded the highest trading volume. The first half of 2016 showed a large decrease in trading volume compared to the last year because of the accumulated fatigue after the price increase and the effects of reinforced credit review regulation. The second half has a higher economic uncertainty such as Brexit and the economic recession. The recent decrease in the prime rate and expanded liquidation will act as positive factors stimulating the sales demand of people who are in actual demand for housing. The effects of them on the actual housing market will determine the recovery of the housing sales market. 71

78 KAB Real Estate Market Report

79 Korea Real Estate Market Report P A R T 3 In-Depth Analysis Analysis 1 Pilot production of Housing Cost Ratio Index and Implications Analysis 2 Designing the Jeonse and Monthly Rent Transition Rental Cost Burden Index Development Analysis 3 The Changes in the Housing Market After the Household Debt Total Management Plan Analysis 4 Analyzing the Causality Relationship between the Housing Price and the Housing Trading Volume

80 Analysis 1 Pilot production of Housing Cost Ratio Index and Implications Lee Junyong, Min Chulhong 1. Introduction Recent jeonse (full deposit with no monthly rent) cost increase and the transition to the monthly rent increased the rental cost and the housing cost burden of tenants. However, there are not many means or proper reasons to control it because it has characteristics of the private sector. Active involvement of government to reduce the housing cost can cause the infringement of property rights and it may disturb the market. Therefore, it should be approached carefully. Instead, the government should actively consider indirect supporting policies such as focusing the housing support to the social class or area with high housing burden and reducing the speed of housing burden increment. To identify the class and region in demand, which can be achieved by continuously observing the housing cost burden and understanding the housing cost burden by region is the top priority. This article acknowledges the current status of lacking related statistics although the importance of the statistics on housing cost burden. Furthermore, it aims to develop an internationally comparable South Korean style housing cost ratio index with reflecting the characteristics of the domestic rental housing market. To achieve this, firstly, we reviewed the housing cost level indices, which are internationally in use, and identified available domestic survey data. Using these data, we diagnosed the possibility of a composition. Secondly, a method to measure the housing cost level of the jeonse and the monthly rent with deposit, which is derived from the jeonse, was designed. Both systems are main characteristics of 74 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

81 P A R T 3 In-Depth Analysis the domestic rental housing market. Unlike the foreign monthly rental system, the domestic housing leasing contract system asks to pay the deposit equivalent to the price of the house. We reviewed previous studies converting this type of deposit to the monthly rent to calculate the housing cost. Moreover, we designed a way to estimate the South Korean style housing cost burden level index by preparing a way to converting the deposit with considering the characteristics of a deposit and the means of tenants to secure the deposit. Thirdly, we identified the final production plan by comparing applicable plans and diagnosed the appropriateness of indices by producing major indices as a test. 2. Review on the Housing Cost Level Indices of Foreign Countries and the Possibility of Creating Domestic Indices A. Housing Cost Burden Level of Main Foreign Countries The internationally common concept of the housing cost includes the fixed cost for a living such as water, gas, electricity, and heating cost in addition to the rent. In the OECD, the housing cost is defined as the actual rent(monthly dues for owned property) and other expenses including the repair cost of a house, the maintenance cost of a house, water, water, electricity, and gas. OECD member countries independently conduct household income and expenditure surveys and collect and announce the housing cost level. The rent to income ratio (RIR) is the only available index regarding the housing cost of South Korea. The denominator of it (the housing cost) only include the rent. The leasing contract forms of South Korea are derived from jeonse so the deposit, equivalent to the house cost, should go through a conversion process. The RIR of the housing status survey calculates the rent by adding the monthly rent with the converted rent, which is calculated by applying the nationwide jeonse and monthly rent conversion rate to the deposit. We will discuss the problems associated with the conversion but there are only few countries producing statistics similar to the RIR. <Figure 3-1> shows the housing cost burden level indices of various countries reported by the OECD. It indicates the ratio of the housing cost against the disposable income. Since it is not reported in South Korea, the RIR (2014) is inserted as a substitution. It shows that the 75

82 Denmark(`12) Norway(`12) Turkey(`13) Spain(`11) Belgium(`12) Italia(`11) Finland(`12) Ireland(`10) Switzerland(`12) Estonia(`12) Canada(`12) Poland(`13) New Zealand(`13) South Korea(`14) Japan(`13) United Kingdom(`12) Australia(`11) Source: OECD Figure 3-1 Housing cost ratio level of major countries (OECD statistics) housing cost burden of South Korea is lower than that of OECD members in general. The comparison cannot be very meaningful because the standard of RIR and the OECD housing cost burden index composition method are different and the industrial structures among countries, housing policies, and household expenditure structure are different. The water, heating, and maintenance cost do not influence the total housing cost much, so they can be compared with some considerations. B. Possibility of Creating a Domestic Index 1) Basic Data for Creating an Index We reviewed if we can estimate the income and housing cost ratio, widely used in many countries, by using the existing data without having an additional survey. We diagnosed if an internationally comparable housing cost can be estimated. The representative surveys related to the housing cost are the household trend survey and the household finance and welfare survey by Statistics Korea and the housing status survey by Ministry of Land, Infrastructure and Transport. The advantages and disadvantages of these surveys are summarized. The household trend survey itemizes income and surveys the housing cost in detail such as deposit, rent, and other housing expenses, but it does not investigate the loan size portion of the deposit or the 76 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

83 P A R T 3 In-Depth Analysis Table 3-1 Possibility of estimating housing cost items from existing data Classification Objective Major investigation items Disposable income Housing cost items Household trend survey Household life status investigation Income, expenditure, and details Household finance and welfare survey Household financial status investigation Assets, liabilities, and details Housing status survey Household housing condition Investigating detailed items Income after tax Rent Deposit and monthly rent Deposit and monthly rent Deposit and monthly rent Other housing costs Deposit Loan cost Water, heat, electricity, maintenance cost etc - - Housing cost Deposit Loan Deposit Loan existence of a loan. Its sample size is 8,700 households so it is hard to estimate the index by city and province. However, it can estimate the index by quarter. The household finance and welfare survey investigates the loan balance, which is not surveyed in the household trend survey, but it does investigate other housing costs. The housing status survey has 20 thousand sample size and investigates housing cost items but it was surveyed every other year since Therefore, it is impossible to create a long-term time series index. In consequence, the household trend survey is the most suitable data to produce the internationally comparable housing cost ratio index stably. It can construct the long-term time series after 1990 without major constraints. 2) Review on the Deposit Conversion Methods The deposit of South Korean tenants is mostly secured by personally retained cash or a support from relatives or bank loan, if it is not sufficient. Various methods are used to convert this stock concept deposit to the cash flow such as monthly rent. However, there is no consensus on the conversion method. <Table 3-2> summarizes the deposit conversion method of representative studies, which estimated the housing cost. They can be classified into two types. The first is to convert the deposit as an opportunity cost because the tenant cannot use the deposit to other investment due to the entrustment to the landlord. The interest rate, estimating an opportunity cost, is 77

84 Table 3-2 Previous studies on the deposit conversion method related to housing cost Researcher (publication year) Deposit conversion rate Concept S.Y. Lee (2015) E.C. Jung and S.J. Cho (2005) Y.M. Lee (2015) J.W. Kim and E.C. Jung (2011) H.Y. Park et al. (2015), Y.R. Lee and E.C. Jung (2015), J.H. Han, S.B. Choi, and K.S. Kim (2015) I.H. Song (2013) Deposit Risk-free rate of return (3 year treasury bond interest rate) Deposit nominal interest rate (return of corporate bond) Deposit weighted mean interest rate : proposed a weighted mean of the deposit interest and jeonse loan interest Deposit mean interest rate (=loan interest rate*(ltv)+(receiving interest*(1-ltv))) Deposit the jeonse and monthly rent conversion rate Deposit the jeonse and monthly rent conversion rate or jeonse loan interest rate Opportunity cost of a deposit Opportunity cost of a deposit and purchasing cost Pure monthly rent conversion Pure monthly rent conversion or full deposit loan calculated by using the interest rate of a 3 year treasury bond, the earning rate of a corporate bond, and a bank interest. Some use the weighted mean interest rate of deposit interest and loan interest with considering that a portion of the deposit is loaned. The second concept is to convert the deposit of the jeonse or the deposit of the monthly rent with a deposit to pure monthly rent. In other words, it uses the jeonse and monthly rent conversion rate to convert the deposit to pure monthly rent. 3) The Characteristics of a Deposit and an Appropriate Conversion Interest Rate with Considering the Deposit Securing Method The characteristics of a deposit and the means of securing it are the first things to consider for measuring the opportunity cost of tenants. Generally speaking, the deposit is used for a long-term residential purpose by a tenant, the deposit can be cashed without a big constraint, and it has a low possibility of a principal loss even under major external impacts such as the foreign exchange crisis and the global financial debacle. If we list evaluation criterion to compare the disagreement with other market interest rates with considering these characteristics. It can be said that the deposit has the characteristics of durability, liquidity, principal conservation, and no-risk. 78 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

85 P A R T 3 In-Depth Analysis Table 3-3 Conversion interest rate selection criterion and review results with considering the characteristics of a deposit and the securing method Classification National and public bond Deposit interest Market interest (CD and corporate bond) Durability (immature market ) (no maturity) (maturity exists) Jeonse loan interest (the presence of policy influence) Liquidity (maturity exists) (free to withdraw) (limited liquidity) - No-risk Principal conservation Universality (no default risk) (possibility of bank bankrupt) (high variability) (reflecting additional interest) (high possibility) (high possibility) (low-risk) - (a few people understand) (widely understood) (a few people understand) (deposit=asset) The deposit is secured mainly by personal capital, deposit loan, and free support. We can identify the proportion of loaned households or the proportion of the loan by combining several items in the housing status survey. According to the results of 2014 housing status survey, 7.4 million households were estimated to have a deposit and the funding securing method. Among households with a deposit, 11.7% of them loaned a portion of a deposit or the full amount. On average, they loaned 45.7% of their deposit. It showed that tenants generally secured the deposit with a personal capital or a support. Five criterion can be selected with considering the general deposit securing method in addition to the previous stated four criterion (i.e., durability, liquidity, principal conservation, and no-risk). The government and public bonds are not financial products, which a tenant will invest, because domestic treasury bond market is not development and only a few experts have knowledge on it. Moreover, representative market interest rates such as the general CD interest rate and the return of corporate bond are partially suitable to the criterion. Jeonse deposit loan is not suitable because tenants generally secure a deposit with a personal capital. The deposit interest has characteristics very similar to the deposit and it secures the rate of return. Therefore, it can be the most appropriate conversion interest rate in the aspect of an opportunity cost. 79

86 3. Pilot Production of the South Korean Style Housing Cost Ratio Index A. Index Type and Production Method The production method of the housing cost ratio index is summarized based on what has discussed. The first is to convert the deposit into the opportunity cost of a tenant and include the converted rent in the rental cost. Secondly, the deposit interest is selected as the conversion interest rate satisfying all five selection criteria, which reflect the characteristics and the deposit securing method. Thirdly, the housing cost includes fixed costs such as water, electricity, and heating costs in addition to the rent. Fourthly, the household trend survey data is used as the basic data to compose because a long-term time series index can be made out of it and housing expenditure cost items are surveyed consistently. There is an item to be reviewed in converting the deposit before conducting a pilot production. Because the deposit is almost equivalent to the cost of a housing, the index can be unstable depending on the conversion method. The first alternative is to directly use the regular deposit interest rate as a reference of an index. The second alternative is to use the weighted mean of the deposit interest and the loan interest. It is similar to the proposed housing cost estimation method, which converted the deposit to an opportunity cost (Lee Table 3-4 Application concept and strength and weakness by the deposit interest application type Classification Content Logic Option 1 Option 2 Option 3 Deposit interest The opportunity cost of deposit Weighted mean of deposit interest and loan interest Accumulated mean of deposit interest A household, secured the deposit with personal fund, uses the deposit interest and a household, secured the deposit with a loan, use the loan interest The proportion of loan household is estimated from the housing status survey. Existing tenant: Expected value of an opportunity cost for a long-term New tenant: Pay the existing tenant s expected opportunity cost Strength, weakness, and limitation The change of interest rate directly influence the variation of the index(unreality) The household loaned deposit are assumed to loan 100% of the deposit. Set the period of the mean opportunity period estimation 80 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

87 P A R T 3 In-Depth Analysis 2015; Kim and Jung, 2011). The weight can be estimated from the proportion of loan in the deposit. The third alternative is to apply the mean opportunity cost with considering the period of the deposit entrustment to a landlord. It applies the accumulated mean interest rate for the period of a lease. Each alternative has several strengths and weaknesses. As stated, unstable deposit interest rate directly affects the changes of the index in the 1 st alternative, which is a weakness. Moreover, a tenant generally resides 1~2 year(s) or a longer term so it is not realistic. The household trend survey does not allow to know whether a household gets a loan or not and estimate the size of a loan. Therefore, the 2 nd alternative calculated the weighted mean by using the proportion of the deposit interest rate and the loan interest rate, where the loan was assumed to be the 100% of the deposit. However, this assumption is unrealistic considering the fact that the mean deposit loan is around 40%. The 3 rd alternative requires a clear logical foundation to set a mean opportunity cost period. The general lease term is 2 years so it is not too hard to select an accumulated mean period. B. Pilot Production of Major Indices There are four types of indices, which can be produced by using the household trend survey. They are occupation type(jeonse and monthly rent), region(city and non-city), and index by income quantile. It was produced for all indices and by occupation type <Figure 3-2>. The housing burden level of 2015 was 19.4% and the housing burdens of the jeonse and the monthly rent were 15.1 and 24.0%, respectively. Although the jeonse price and the monthly 30% Figure 3-2 Housing cost ratio index by occupation type Figure 3-3 Housing cost ratio index by region 30% 20% % % `11 `12 `13 `14 `15 10% `11 `12 `13 `14 `15 Jeonse Monthly rent Total City Non-city 81

88 rate increased, it slightly decreased from that in It was because of the jeonse system, which is the characteristic of the domestic lease market. As stated before, it was because the burden change of the jeonse or monthly rent deposit due to due to the decrease of an interest rate could not produce a consistent result. However, the jeonse showed that the burden decreased although the jeonse price consistently increased. It meant that the lower interest rate influenced it more than the higher jeonse price. It was because the opportunity cost, given up by a tenant, decreased although the jeonse deposit was the same or increased. It was a temporary phenomenon due to recent consistent interest rate decrease. On the other hand, the housing cost ratio index by region is the same as <Figure 3-3>. They were 19.7 and 17.7% for city and non-city region, respectively, in City regions with many jeonses 1) were similar with the housing cost burden level index result. The housing cost burden level index of non-city regions with many monthly rents increased since At the aspect of the income quantile, the 1~2 income quantile in 2015 was 32.6%, the 3~4 quantile was 21.1%, 5~6 quantile was 15.1%, 7~8 quantile was 12.7%, and 9~10 quantile was Figure 3-4 Housing cost ratio index by income quantile Figure 3-5 Housing cost ratio index of households residing in the permanently rented housing. 40% 30% % 20% % % `11 `12 `13 `14 `15 1~2quantile 3~4quantile 5~6quantile 7~8quantile 9~10quantile 10% `11 `12 `13 `14 `15 Rental housing 1) According to the 2014 housing status survey, the proportions of the monthly rent in the capital area were 45.0, 45.6, and 47.4% for Seoul, Incheon, and Gyeonggi, respectively. Those of regional metropoitan cities were 63.8, 58.8, 64.4, 66.9%, and 55.5% for Busan, Daegu, Gwangju, Daejeon, and Ulsan, respectively. Non-city area had a higher monthly rent proportion with more than half of monthly rent in provinces (Gangwon 71.0%, Chungbuk 58.7%, Chungnam 70.8%, Jeonbuk 79.9%, Jeonnam 75.9%, Gyeongbuk 71.8%, Gyeongnam 68.8%, and Jeju 87.0%) 82 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

89 P A R T 3 In-Depth Analysis 11.3%. The variation of the index increased as the income gets lower (Figure 3-4). It is possible to identify households residing in the permanently rented housing with the household trend survey. Their housing cost burden was 21.1%. Considering that the housing cost burden of income quantile 1~2, who mainly use the facility, is 32.6%, the permanently rented housing is effective in reducing the housing cost burden. Moreover, the level is similar with that of income quantile 3~4 and slightly larger than the overall average (19.4%). The housing cost burden was good. 4. Conclusions and Future Directions Major results are summarized. Firstly, the housing cost burden level was 19.4% in The housing cost burdens of the jeonse and the monthly rent were 15.1 and 24.0%, respectively. The housing cost burden level indices by region were 19.7 and 17.7% for cities and non-city regions, respectively. The housing cost burden of city regions was higher than that of non-city regions. Thirdly, they were 32.6%, 21.1%, 15.1%, 12.7%, and 11.3% for income quantile of 1~2, 3~4, 5~6, 7~8, and 9~10, respectively, in It showed that lower income had higher variation in the index. Fourthly, the housing cost burden of households residing in the permanently rented housing was 21.6%. Considering that the housing cost burden of households in the income quantile 1~2 was 32.6%, residing in the permanently rented housing effectively reduced the housing cost burden. The political implications of these results are. Firstly, it is necessary to increase the housing cost support to the low-income class, who has a high housing cost burden. In particular, the lower income class had a higher housing cost burden. It meant that the class has high fixed cost expenditure burden such as water, electricity, and heating costs compared to their income. Supports should be made with considering this. Secondly, methods should be found to support applicants with a high housing cost burden level such as a housing salary or an energy voucher. Thirdly, residing in the permanently rented housing was very effective in saving the housing cost burden of the low-income class. Although a financial problem should be solved, it is necessary to expand the supply of the rental housing for the homeless low income to reside for a long-term stably, since the rental housing had a clear housing cost saving effect. 83

90 Reference K.H. Kim, S.Y. Lee, M.S. Cho, G.S. Lee, and J. Lee, Case study on foreign housing dwelling welfare policy, Ministry of Land, Transport and Maritime Affairs, Research and Service Report, 2012 J.W. Kim and E.C. Jung, Analysis on the characteristics of the housing demand by age class, Housing Studies Review, 19 (2), 2011 H.Y. Park, C.M. Lee, J.H. Kim, M.S. Choi, H.T.Joo, and J.Y. Kim, New housing statistics development for observing the people s residential life and the real estate market, LH Housing Land Development Insititute, Research and Service Report, 2015 S.S. Bae, S.S. Jin, S.J. Kim and others, Evaluation on the low-income housing welfare expansion policy and future policy direction, Korea Research Institute for Human Settlements, 2008 I.H. Song, Study on the housing cost status of South Korea, The study on a political subject for the midium- and long-term development of the rental housing market, the Korea Development Institute, 2013 S.Y. Lee, The housing cost burden of the rental housing, how can we reduc it?, KB real estate market review, KB Financial Management Institute, 2016 Y.R. Lee and E.C. Jung, Analyzing the effect of income variability on selecting housing occupation type of households, Housing Studies Review, 23 (1), 2015 Y.M. Lee, H.Y. Kim, and H.J. Lee, Status survey on the housing stability related policies, National Assembly Budget Office, Research and Service Report, 2015 E.C. Jung and S.J. Cho, Study on the long-term housing demand forecast according to the changes in population structure, Land Planning, 40(3), 2005 J.H. Han, S.B. Choi, and G.S. Kim, The effects of the changes in relative housing cost on the jeonse household occupation type and moving, Housing Studies Review, 23 (2), 2015 Melanie D. Jewkes and Lucy M.Delgadillo, Weaknesses of Housing Affordability Indices Used by Practitioners, Journal of Financial Counseling and Planning, Volume 21, Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

91 P A R T 3 In-Depth Analysis Analysis 2 Designing the Jeonse and Monthly Rent Transition Rental Cost Burden Index Development Lee Junyong 1. Background of Index Development Design The main issue in the rental housing market is the rapid transfer to monthly rent such as the increase of monthly rent supply and trade due to the decrease of jeonse (a housing rental form with a full deposit and no monthly rent) supply. We can come up with a timely plan or various preventative measures if we statistical data on how much jeonse has been transferred to the monthly rent and how much more living expenses incur due to this transfer. However, housing statistics are developed mainly for housing so relevant statistical results are hard to find. Moreover, sample studies such as residential condition survey are conducted annually or biannually, which is hard to immediately respond to the rapidly changing market condition. Lacking statistical data, which can timely capture the market condition, does not allow us properly diagnose occurred problems and limits the introduction of effective policies. If we can identify the rental cost difference between the past and the current, the speed of the rental cost change, and area with a rapidly increasing rental cost in the transition from Jeonse to the monthly rent, it will allow us to diagnose the problem and come up with countermeasures. There has been a difference in the rental cost. If the speed of its change is slow, other urgent policies should be reviewed first. Contrarily, if the rental cost is increasing and it is fast, it proves that the rental cost burden of tenants increase. We may improve the demand and supply imbalance by supplying rental housing in priority. 85

92 This article aims to introduce a design of index development plan, which can measure the changes in tenants burden under reduced Jeonse supply and increased monthly rent transition. This type of index is needed because there are not enough statistics identifying the burden of tenants due to extended monthly rent transition although this is socially accepted. In particular, monthly rent transition will continue because the foundation of Jeonse system is weakened due to the slowed economic growth and the continued low-interest-rate. It is believed that there will be a more social demand to develop indices measuring the structural changes of the rental market. 2. Designing Jeonse and Monthly Rent Rental Cost Burden Index A. The Concept and Basic Data of Jeonse and Monthly Rent Rental Cost Burden Index A general curiosity in the recent rental market is "what is the difference between the cost burn of jeonse and monthly rent?" Alternatively, "how much changes in the rental cost do we expect when we transfer from a monthly rent to jeonse or jeonse to a month rent?" An index needs a reference point and reference, unlike an indicator measuring a certain level, and it should fluctuate in the response of them. Moreover, it should allow a relative comparison based on a reference point or reference. It will be explained in detail in the index design section, the reference point of a burden index is when the rental type is changed and the reference of it is if the current rental type is maintained, where a burden index is assumed to be able to solve the curiosity. The jeonse and monthly rent transition rental cost burden index should provide information on the difference in rental cost when one change to a monthly rental form instead of maintaining the current jeonse form. For example, when the current jeonse rental cost is 100 and it increases by 10% after a certain period, the rental burden of a new jeonse contract or a renewal is 110, 10% increase. Contrarily, if the one makes a monthly rental contract instead of jeonse and the rental cost is 115, the rental cost change due to the rental type change (from jeonse to monthly rent) will be 115 over 110. In this case, the final form of the jeonse and monthly rent transition rental cost burden index can be expressed as (115/110) at the point of transition. If there is almost 86 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

93 P A R T 3 In-Depth Analysis no change in the transition, the index is 100. In other words, if it is close to 100, there will be a less change due to a rental form variation. Af the index is further from 100, the burden due to a rental form change will increase. On the other hand, collected data through a sample survey contains annually surveyed information according to a fixed survey item format targeting sample households and panel households. For example, it investigates how much money a household earns and pays for a residential cost and what is the housing type and occupation form and generate related statistics. These data have the advantage to observe these households in detail. However, it costs a lot of time and money to conduct a survey. It takes a few months to produce statistical results so it is hard to say that the statistics have a proper timing. Data observing jeonse and monthly rent is the fixed date declaration information, which is for having the deposit back. Moreover, the fixed date declaration information contains the housing rental form type, jeonse deposit, monthly rent deposit, and monthly rent. Moreover, the most of the rental properties are private owned extra housings, which is the characteristic of the South Korean rental property. There would be a large quantity of steadily rented housing and the same property will be rented repeatedly. Therefore, if the fixed date declaration information is accumulated, a repeatedly rented housing can be identified and we can identify the rental form, deposit, and monthly rent level. B. The Expansion of Jeonse and Monthly Rent Transition Rental Cost Burden Index There are four possible rental type combinations for a house with more than two fixed date declarations are made. First case is a jeonse housing is rented again as a jeonse and the meaning and conceptual diagram of rental cost percent change between two points is the same as <Figure 3-6A>. The rental costs at the first time ( ) and second time ( ) are and, respectively. If is times larger than, is equal to the multiplication of and ( ). The concept to estimate is identical to the concept of the conventional repeated sales model index. 87

94 Figure 3-6 The conceptual diagram of the jeonse and monthly rent transition rental cost burden index A. Jeonse cost index a. Jeonse and monthly rent transition index r r r R,q b a 1 r J,q a r J,q r J,p a 0 r J,p a 0 p q t p q t B. Monthly rental cost index b. Monthly rent transition index r r r J,q d r R,q c r R,q b 1 b 0 b 0 r R,p r R,p p q t p q t Additional Change when a Contract is Changed from Jeonse to Monthly Rent than it is Maintained as a Jeonse Contract If there is a difference between monthly rental cost and jeonse rental cost and the ratio is, the rental cost of monthly rent ( ) at the second point ( ) is equal to the multiplication of jeonse rental cost ( ) and ( ). For example, if the jeonse rental cost at the first time was 110 and the jeonse rental cost at the second time ( ) was 120, is approximately (= ). If the monthly rental cost is 122 at the first point ( ), will be approximately (= ). In other words, 122 is equal to the multiplication of 110,, and (Figure 3-6a). If is 1, it means that renting a property as a monthly rent is the same as renting it as a jeonse rent. 88 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

95 P A R T 3 In-Depth Analysis Additional Change when Making a Jeonse Contract from a Monthly Rent Contract than Making a Monthly Rent from a Monthly Rent When renewing a contract or making a new contract, we can think of a jeonse transition compared to a monthly rent. If the monthly rental costs were and at time and, respectively, and is times larger than is equal to the multiplication of and ( ). The change of addition cost in making a monthly rent contract instead of making a jeonse contract can be defined as and it can be calculated in the same way as. The jeonse rental cost ( ) at time q is equal to the multiplication of, monthly rental change ratio from the monthly rent ( ), and ( ). The Relationship Between the Additional Changes Due to Jeonse Transition and Monthly Rent Transition On the other hand, when the jeonse rental cost and the monthly rental cost are compared to time q, it can be found that it was, in the <Figure 3-6A, 3-6a> and, in the <Figure 3-6B, 3-6b>. If the rental cost of the jeonse and the monthly rent are expressed the same, and are in a reciprocal number relationship ( ). They are expressed differently because the transition from the jeonse to the monthly rent generally follows the market value while the population of jeonse to monthly rent conversion and the population of monthly rent to jeonse conversion are different. In other words, the one directional transition means that rental property type focuses on that rental type. The supply and demand of that rental type affect the price and the transition ratio. 3. Review the Possibility of Creating the Jeonse and Monthly Rent Transition Rental Cost Burden Index A. Basic Data Construction The jeonse and monthly rent fixed date declaration data are the basic data for creating an index and all open data from 2011 to the current is used. Open data excluded duplicated information and contract revocation among all data reported to RTMS and the reported price is verified. 89

96 Table 3-5 The apartment jeonse and monthly rent fixed date declaration data (based on open data) Classification Total Monthly rent 152, , , , ,645 57, ,949 (25.8) (26.3) (31.8) (32.3) (37.8) (38.2) (31.0) Jeonse 437, , , , ,931 92,606 2,108,114 (74.2) (73.7) (68.2) (67.7) (62.2) (61.8) (69.0) Sum 589, , , , , ,894 3,057,063 Note: The proportion against the total (unit: %) To extract a pair of repeated transaction from the jeonse and monthly rent fixed date declaration information, the same house should be easily identifiable. Apartments are well distinguished by a complex and building and room number are clear. Each complex has a reasonable size of households so effective data can be acquired. Therefore, the apartment was selected to produce an index as a pilot study. The trend of the jeonse and monthly fixed date declaration of apartments are the same as the <Table 3-5>. There are total 3.05 million jeonse and monthly fixed date declaration data from 2011 to Apr There are 940 thousand monthly rents and 2.1 million jeonse. Monthly rent is smaller than jeonse because people do not declare the fixed date if the deposit is a small quantity. However, the fixed data declaration ratio between the jeonse and the monthly rent decreased compared to the past. The proportions of the monthly rent and the jeonse were 25.8 and 74.2%, respectively, in 2011 but they were 37.8 and 62.2%, respectively. It showed the increase of the monthly rent. After giving a housing a unique ID based on 3,056,860 cases of the jeonse and monthly rent fixed date declaration information excluding errors mismarking the jeonse as the monthly rent, whether a house has the jeonse and monthly rent fixed date declaration information or not. There were 1,260,003 houses declaring it only once since 2011 and the other 1,796,857 cases were for houses declaring more than twice. When the repeated sales data is established based on this, the size of data is decreased. For example, if a house was traded three times, two repeated sales pairs are made; the first and second pair and the second and the second and third pair. As 3 declarations were reduced as 2 pairs of trades, 1,796,857 cases were reduced to 1,023,130 of pairs in the process of establishing the repeated sales pair data. Moreover, some pairs were excluded because it was hard to consider that it was an actual rental period such as a personal reason. Total 991,564 cases of trade pairs were established 90 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

97 P A R T 3 In-Depth Analysis Table 3-6 The number of effective data during data sorting process Number of effective data 0. Open data 1. Jeonse and monthly rent declaration error 2. Cases with more than 2 trades 3. Repeated sales data establishment 4. Equal or more than 1 month residence period 3,057,063 3,056,860 1,796,857 1,023, ,564 (203) (1,260,003) (773,727) (31,566) Note: Parenthesis indicating the lines excluded in the process of data sorting and data organization for extracting model data after excluding 31,566 pairs with less than 1 month residence period. B. Index Production Target and Index Pilot Production Result 2) The results of pilot production in this article are the conversion to an index form by using and. As discussed previously, these constant values indicate the extra cost ratio of making a monthly rent contract from a jeonse contract and the extra cost ratio of making a jeonse contract from a monthly rent contract, respectively. The calculation of the Jeonse rental cost and the monthly rental cost was done by estimating the mean rental cost during the residence period between two the fixed date declarations. The rental cost of a housing was estimated by summing the opportunity cost of the deposit and the monthly rent. The interest rate of deposit was calculated by using the 4 year accumulated interest rate with considering the contract renewal. 3) Moreover, the statistical reliability of an index was determined at the level of diagnosing the possibility of producing an index. The coefficient of variance (CV) was used as an evaluation method. 4) Due to the characteristics of a rental contract, the price of jeonse and monthly rent varies a lot depending on the interior condition and maintenance status even for houses in the 2) Refer appendix for the details of formal deriving process 3) A method to properly converting the deposit was dealt enough in the in-depth analysis 1, so it is omitted here. Conversion interest rate can be 2 year and 4 year accumulated interest rate with considering the type of deposit and the way of supply The 4 year accumulated interest rate is the mean opportunity cost for 1 renewal and the 2 year accumulated interest rate is the mean opportunity cost of the common rental contract. Rental cost is the concept of adding the opportunity cost and monthly rental cost and the conversion method was applied. The pilot study estimated the opportunity cost by using the 4 year accumulated interest rate to secure the index stability. Lee et al. (2015) proposed to use the deposit interest as the deposit conversion interest rate and the weighted mean interest rate of the deposit interest and the loan interest, when portion of deposit was secured by the loan. 4) Lee et al. (2012) suggested CV for the statistical reliability of an index, stability indexfor the stability of index trend, and the signalto-noise ratio for the statistical reliability of an index variation. 91

98 same layout. Depending on the balcony expansion, window frame, basin and bath tube condition, wallpaper, and floor finishing, the size of deposit can vary by 7 to 8 figures. If new construction is performed before the second transaction, it is impossible to identify it from the fixed date declaration and its effect cannot be controlled. Moreover, there are not enough pairs because the period of the fixed date declaration is not long enough. It can be overcome by acquiring more pairs by using some assumptions on the same house even though they are not physically the same house. In other words, there is a way to expand the repeated trade pair to secure the stability of an index. For the apartment, some with similar size and layout can be considered the same house. If we apply this assumption, we can establish repated trade pairs as along as they are in the same house category. The apartment actual sales price index use the same method. The price of the first and top floor is different from other floors, so it distinguished the first, top and other floors. The same rule applies to here. The top floor has a high demand and an expected value increase as a capital but this effect is diminished in a rental form. Since there are not enough basis that the effect persists in the rental cost so the same house rule only distinguished the first and the other floors. As shown in the <Table 3-7>, the number of effective data was doubled compared to the repeated trade pair of an each housing. The results were estimated in the same way <Figure 3-7>. The index fluctuation between 2011 and 2012 was more stable than when the repeated pair fore each housing was used. The CV value was decreased to a stable level. Moreover, the index decreased slightly in the second half of 2015 and it shows a similar pattern in other periods. It was because the rental demand decreased in the winter season and the variation of the jeonse and monthly rental price was small. In other words, there is a little demand to accept the conversion from the jeonse to the monthly rent by a leaseholder, the cost increase Table 3-7 The number of effective data in data sorting process Number of effective data 0. Open data 1. Jeonse and monthly rent declaration error 2. Cases with more than 2 trades 3. Repeated sales data establishment 4. Equal or more than 1 month residence period 3,057,063 3,056,860 2,359,601 2,185,533 1,969,880 (203) (697,259) (174,068) (215,653) Note: Parenthesis indicating the lines excluded in the process of data sorting and data organization for extracting model data 92 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

99 P A R T 3 In-Depth Analysis Figure 3-7 The pilot result of nationwide jeonse and monthly rent transition rental cost burden index (unit: %) Nationwide C.V of the monthly rent, which directly reflects the market price, is large when there is a high rental demand such as the school entrance season. The results of using the trading pair of each housing were 170~200 and the results of using the trading pair of the same housing assumption were 120~135. The index level was Figure 3-8 The pilot result of jeonse and monthly rent transition rental cost burden index in the capital area and non-capital area (unit: %) Capital index Non-capital index C.V-capital C.V-non-capital

100 a downward shift. It shows the slight increasing trend from 2011 to the middle of <Figure 3-8> shows that the index was produced for the capital area and the non-capital area separately. In the same way, the index variation was in an upward shift to be stable and the jeonse and monthly rent transition burden of the non-capital area were maintained at a higher level than the capital area. 4. Implications and Future Directions Recently, tenants have a higher housing cost burden due to the recent decrease in the jeonse supply and the expansion of the monthly rent transition. However, there is not enough statistics measuring the burden of tenants in converting from the jeonse to the monthly rent. As it is expected that the transition to the monthly rent continues, it seems that the needs of this kind of statistics increase. This article designed a way to develop an index, which can measure the burden of tenants in the transition from the jeonse to the monthly rent, and several indices were produced as a test to investigate if it can be actually produced. Several implications are acquired in the process of producing the jeonse and monthly rent transition rental cost burden index. Firstly, the burden was larger in regional blocks than the capital area when the jeonse was converted to the monthly rent. It was because the conversion rate from the jeonse to the monthly rent was higher in the regional blocks than in the capital area, because the portion of a deposit is converted by the conversion rate from the jeonse to the monthly rent. Secondly, although there was a difference by the way to construct a repeated trade pair, the extra cost converting from the jeonse to the monthly rent is gradually increasing. The results show that tenants feel more burdened in the increase of the jeonse and monthly rent due to the structural changes in the rental market and there is an actual increase in the burden of converting from the jeonse to the monthly rent. The repeated trade pair on the same housing assumption could produce more pairs the repeated trade pair of the same house. It can minimize the effects of housing s physical variations, which cannot be controlled by the fixed data declaration data. These results improved the reliability of the index and index fluctuation but the variability was still high. To improve this, various reviews and analyses, including index production for the lower region and index by a quarter, are needed. Further detailed reviews are left for the future study. 94 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

101 P A R T 3 In-Depth Analysis References Y.M. Lee, H.Y. Kim, and H.J. Lee, Resident stability policy related actual study, Research and Service Report of National Assembly Budget Office, Y.M. Lee, C.M. Lee, and E.C. Jung, Non-condominium actual trade price index research and development, Research and Service Report of Minstry of Land, Transport and Maritime Affairs, J.Y. Lee, The needs of expanding the statistics on the monthly rental market and housing cost burden level index, Presentation material for the symposium for improving the housing statistics,

102 Appendix (The jeonse and monthly rent transition rental cost burden index theoretical model and index estimation model design) The equations derived in the article for explaining the index concept and the designing process are used. Housing service costs (or rental costs) for the jeonse and the monthly rent are and, respectively. If both trades were the jeonse, they would be and (Equation 1) <Jeonse Jeonse> (Equation 1) (here, means an error term) However, if the second trade was the monthly rent, the rental costs of the first and second trades were and, respectively. If the cost difference between the jeonse ( ) and the monthly rent ( ) is the monthly rent ( ) will be. When the jeonse ( ) in the Equation 1 is replaced by the monthly rent ( ), Equation 2 will be derived. <Jeonse Monthly rent> (Equation 2) (here, means an error term) Moreover, if the first trade is the monthly rent and the second trade is the monthly rent, they will be and, respectively. Equation 3 can be derived from the Equation 1 in the same way. 96 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

103 P A R T 3 In-Depth Analysis <Monthly rent Monthly rent> (Equation 3) (here, means an error term) In the same way, if the second trade is the jeonse, the rental costs of the first trade and the second trade will be and, respectively. If the cost difference between and is, the jeonse ( ) can be expressed as. When in the Equation 3 is replaced with, Equation 4 can be derived. <Monthly rent Jeonse> (Equation 4) (here, means an error term) By organizing (Equation 1), (Equation 2), (Equation 3), and (Equation 4) and composing dummy variable distinguishing trades at the first and the second trades, (Equation 5) and (Equation 6) can be expressed. (Equation 5) = -1 : The case of the first jeonse trade at time t 1 : The case of the second jeonse or the monthly trade at time t 0 : The others = 1 : The case of the second trade is the monthly rent at time t 0 : The others (Equation 6) 97

104 = -1 : The case of the first monthly rent trade at time t 1 : The case of the second monthly rent or the jeonse trade at time t 0 : The others = 1 : The case of the second trade is the jeonse at time t 0 : The others estimated from (Equation 5) is a multiplier estimating the change of the jeonse rental cost. It can be converted to the jeonse cost change index form. is a multiplier representing the conversion to the monthly rent in addition to the conversion from the jeonse to the jeonse. It can be converted to an additional burden index as it is converted from the jeonse and the monthly rent. In the same way,, estimated from (Equation 6), estimates the changes in the monthly rental cost and is converted to the monthly rent cost change index. The is a multiplier representing the conversion to the jeonse in addition to the conversion from the monthly rent to the monthly rent. 98 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

105 P A R T 3 In-Depth Analysis Analysis 3 The Changes in the Housing Market After the Household Debt Total Management Plan Park Gwayoung 1. Introduction The principal and interest early redemption by installment policy based on the accurate income was employed from the capital area to other regions by stages since Feb The objective of it was to reduce the possibility of systematical financial crisis by increasing the safety of housing finance. However, it contracted the market because it reduced the actual size of the collateral loan. On the other hand, the household debt total management plan excluded the group loan related to the presale housing market. The household debt total management plan affected the presale market, including the existing apartment sales market and lot ownership trade, differently. It could cause a decoupling phenomenon between the apartment market and the distribution market. This study evaluated the changes in apartment sales market and the distribution market after the household debt total management plan and identified if there were any differences in these two markets. Based on the Feb 2016 when the household debt total management plan was applied, changes before and after the application was evaluated by comparing the after four months (Feb 2016~May 2016) and the before four months (Oct 2015~Jan 2016). Moreover, year-on-year variation was also considered by using data between Feb 2015 and May 2015 to consider the seasonality of the housing market. The spatial scope of the analysis was the capital area, where the plan was applied to last Feb. Transactions used for the analysis were pure transactions between individuals excluding the equity transaction. 99

106 2. Household debt total management plan A. Main Contents of Household Debt Total Management Plan The household debt total management plan, announced on Jul , is based on three basic directions, which are (1) the household income advancement and the enhanced repayment ability through expanded macroeconomic policy, (2) the household debt management reinforcement and the relaxation of the working class s interest burden, and (3) family finance stabilization by enhancing employment, welfare, and connected support. Household debt management reinforcement plan among them is composed of four basic directions, which are (1) loan structure improvement oriented by fixed interest rate and redemption by installment, (2) improved review on ability for repayment, (3) reinforced management on real estate mortgage loan from the secondary mortgage market and credit loan, and (4) improvement of financial companies, Korea Housing Finance Corporation s, and households response-ability and monitoring reinforcement. It is to systematically control the systematic financial crisis, which means the expansion of financial crisis derived from the real estate to the financial market, by determining the loan amount level suitable to repayment ability with considering the objective income level of home buyers and forming a stable repayment structure regardless of macroeconomic fluctuation such as the changes in the interest rate. The plan was applied by stages - to capital area in Feb 2016 and to the other areas in May The household debt total management plan does not have a characteristic of the direct loan regulation such as the loanable amount reduction by strengthening DTI and LTV rates. However, it can limit the size of the indirectly available fund by paying off the principal in the early stage through an installment redemption. Previously, the DTI ratio estimation did not consider the redemption of credit loan amount except the collateral loan. If the DSR regulation, which considers the repayment burden of the total debt, is introduced, it can be a direct loan regulation to reduce the housing demand. 100 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

107 P A R T 3 In-Depth Analysis B. The Implications of Debt Composition and Change in the Increasing Trend after the Household Debt Plan Previous studies analyzed the relationship between the LTV and DTI loan regulations and the housing demand. For example, time series analysis using housing trading case data including housing collateral loan (Igan and Kang, 2011), system dynamics (Lee et al., 2009), simulation analysis (Ko and Yoon, 2008; Koo 2007; Lee and Jung, 2010) were used to prove the relationship between the strengthened regulation and the housing market changes. They argued that loan constraints could reduce the housing consumption by weakening the expectation of housing price increase. However, they could prevent an excessive borrowing, potentially exceeding repayment capacity. The increasing trend of the household credit loan largely relaxed in the first quarter of 2016, which was the half of the previous quarter. It was because the household loan, particularly mortgage loan, decreased by approximately 45% - the magnitude of increase was 24.8 trillion KRW in the 4 th quarter and 13.7 trillion KRW in the 1 st quarter. The increasing trend of the group loan for apartment lotting-out middle payment and the balance maintains, not decreases. It allows us to find the possibility of decoupling between the existing housing sales market and the distribution market due to the implement of the household debt total management plan through the increasing trend of a loan. Table 3-8 The trend of household debt increase after 2015 (unit: Trillion KRW) Items Year 1Q 2Q 3Q 4Q 1Q Balance Household credit ,223.7 Household loan ,158.5 Mortgage loan Bank (Group loan) Non-bank others Others Bank Non-bank others Credit aales credit Source: Financial Services Commission Recent Household Debt Trend and Future Management Direction 101

108 3. The Decoupling of Housing Market A. Changes in Trends of the Apartment Sales Market and the Lot Ownership Market The changes of lot ownership and apartment sales in the capital area showed that these two markets had different trends. The lot ownership trading has consistently increased before and after the announcement of the plan since the same period of last year. In Seoul and Incheon, there was little change in the lot ownership trading before the announcement. However, it increased by and 60.34% to indicate the activation of the lot ownership market. On the other hand, the sales trading continuously decreases and the gap of decrease is getting smaller. The sales price of living space 85m² apartment in the capital area increased until the plan was implemented. However, it showed a decreasing trend afterward. It decreased by 3.22 and 3.00% in Incheon and Gyeonggi-do, respectively, to lead the nationwide decrease. Seoul showed a relatively low (0.54%) decrease. The trading price of capital area s lot ownership also increased slightly after the plan employment. However, the trading price of a lot ownership by Table 3-9 Comparisons of lot ownership and apartment sales percent changes by region (unit: Case) City and province Lot ownership Year-on-Beforyear (A) plan (B) plan the After the (C) Yearon-year percent change (C/A-1) Percent change compared to before the plan (C/B-1) Sales trade Year-on-Beforyear (A) plan (B) plan the After the (C) Percent Yearon-year change compared percent to before change the plan (C/A-1) (C/B-1) Nationwide 49,440 48,952 44, % -8.45% 246, , , % % Capital area 8,336 10,612 14, % 38.34% 114,402 85,994 75, % % Seoul 2,434 2,388 3, % 40.28% 47,885 34,757 30, % % Incheon metropolitan 1,198 1,218 1, % 60.34% 18,867 14,279 12, % % city Gyeonggi-do 4,704 7,006 9, % 33.86% 47,650 36,958 33, % -9.91% Source: Korea Appraisal Board RTMS 102 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

109 P A R T 3 In-Depth Analysis Table 3-10 Changes in living space 85m² apartment sales price and lot ownership trading price by region (unit: Thousand won) Apartment sales price Lot ownership trading price City and province Year-onyear (A) Before the plan (B) After the plan (C) Yearon-year percent change (C/A-1) Percent change compared to before the plan (C/B-1) Year-onyear (A) Before the plan (B) After the plan (C) Percent Yearon-year change compared percent to before change the plan (C/A-1) (C/B-1) Nationwide 290, , , % -1.70% 302, , , % 5.47% Capital area 347, , , % -0.77% 412, , , % 0.26% Seoul 475, , , % -0.54% 604, , , % -1.54% Incheon metropolitan 255, , , % -3.22% 384, , , % -3.21% city Gyeonggi-do 293, , , % -3.00% 345, , , % -2.28% region decreased. It is the consequence of a higher trading portion of Seoul area lot ownership trade, which is more expensive. This phenomenon shows the same trend in the increase of the nationwide mean lot ownership. The mean nationwide lot ownership price increased as the lot ownership trade increases in the capital area and its proportion gets higher. Therefore, the mean price changes by region should be checked with the price dynamics by city and province. The lot ownership price decreased and the magnitude of decrease was larger in the Incheon and Gyeonggi-do areas. B. Spatial Distribution of Trading Volume and Trade Price [Figure 3-9] shows the spatial distribution of the apartment sales and lot ownership trading volume before and after the capital area household debt total management plan in the capital area. Apartment sales increased in 18 cities, guns, and gus including Seoul Eunpyeong-gu, Seodaemun-gu, Sujung-gu Seongnam Gyeonggi-do among total 79 cities, guns, and gus. On the other hand, the trading volume decreased in 59 cities, guns, and gus including Seoul Nowon & Songpa-gu and Gyeonggi Ansan Sangrok & Sengnam Bundang-gu. Thirty five cities, guns, and gus among them recorded more than 100 trading volume decrease. Lot ownership increased in 44 cities, guns, and gus. It mainly increased 2 nd stage new cities and 103

110 Figure 3-9 Spatial distribution of apartment sales (left) and lot ownership trading (right) increase and decrease before and after the household debt plan x < x < x -0 1 < x < x x < x 0 0 < x < x < x major new housing development gus including Gyeonggi Hwasung Gimpo Siheung, Seoul Gangseo, and Incheon Seo-gu. Lot ownership trading decreased in 19 cities, guns, and gus. As the existing lot ownership trading units are near the point of moving in mainly at Seoul Seodaemun, Gyeonggi Gwangmyeong Namyangju Yongin Suji-gu areas, the lot ownership trading decreased. [Figure 3-10] shows the spatial distribution of living space 85m² apartment sales and lot ownership trading increase and decrease before and after the household debt total management plan. The sales price mainly showed a decreasing trend in most ities, guns, and gus and continuously decreasing sales price due to decreased sales volume. It showed low increases (<10 million KRW) in 7 cities, guns, and gus. The increase of lot ownership trade price was more distinct in re-development and re-construction in Seoul. 24 cities, guns, and gus showed price increase mainly around Seoul Seocho-gu, Incheon Seo-gu, Gyeonggi Paju city. Seocho-gu had a higher mean lot ownership price for both size types. 104 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

111 P A R T 3 In-Depth Analysis Figure 3-10 Spatial distribution of changes in living space 85m² sales price (left) and lot ownership trading price (right) before and after the household debt plan x -20 million Won -20 million Won < x 0 Won 0 Won < x 20 million Won 20 million Won < x 40 million Won 40 million Won < x x -20 million Won -20 million Won < x 0 Won 0 Won < x 20 million Won 20 million Won < x 40 million Won 40 million Won < x 4. Conclusions As the household debt total management plan, which was planned to be an effect on Feb 2016, was announced in Jul 2015, the atmosphere of the housing market changed abruptly. The plan was taken as a loan constraint by the market and inhibited the housing price increase mentality. Consequently, it decreased nationwide apartment sales and lot ownership trading. However, in the capital area, we are observing a decoupling phenomenon showing decreased sales with increasing lot ownership trade. It showed that market capital, free from the loan constraint, focused on the capital area lot ownership market, even though the loan constraint was applied to the capital area in Feb in advance. The overheated lot ownership trading market leads an excessive increase in lot ownership premium. It should be cautiously dealt because it could increase housing price adjacent to new apartment and old apartments targetted for a re-construction. Ministry of Strategy and Finance announced a plan to stabilize the lot ownership market and support actual demand in economic policy directions for the second half of It pursued the rapid landing of the conventional household debt total management plan. Moreover, it announced to fortify the middle payment loan guarantee system, which set the 105

112 limit of guarantee for housing under 900 million KRW as 600 million KRW for Capital area and metropolitan city and 300 million KRW for regional blocks and limits 2 loans per person to stabilize the distribution market. On the other hand, the size of Didimdol loan, which limits the debt repayment responsibility only to the mortgaged house, was expanded and loan interest rate for the first time home buyer was temporarily decreased to support actual demand. With aiming to a stable housing market, a consistent policy should be employed, localized and persistent monitoring should continue, and policies should be flexible to the market changes by stably running housing finance and reorganizing the distribution market to be oriented by the actual demand. References S.S. Ko and Y.S. Yoon (2008), The effects of housing financial constraints on the housing consumption by income quantile Real Estate Study 14(2): D.K. Lee, I.S. Seo, and H.J. Park (2009), Analyzing the effects of the DTI regulation policy as a mean of housing policy: a simulation analysis using system dynamics, Korean policy studies review 18(4): S.Y. Lee and Y.C. Jung (2009), Analysis on the effects of total debt service ratio regulation on the determination of the housing occopation pattern, Seoul Studies 11(1): Igan, D, and Kang, H., Do Loan-to-Value and Debt-to-income Limits Works? Evidence from korea, IMF Working Paper, S.M. Goo(2007), The effects of mortgage loan collateral constraints by repayment ability on household housing sales, M.S. Thesis, Seoul National University, Graduate School of Environment. All related organizations, Household Debt Total Management Plan, Financial Services Commission and the Financial Supervisory Service, Recent household debt trend and future management plan, Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

113 P A R T 3 In-Depth Analysis Analysis 4 Analyzing the Causality Relationship between the Housing Price and the Housing Trading Volume Lee Jiyeon 1. Introduction The government has dealt the issues of the housing market by strengthening regulations when the housing price increased sharply and relaxing regulations when the sales are slow. However, some policies were announced after the market moved and the effects of implemented policies were in effect a long while later. Therefore, it is the most critical to understanding the interconnectivity between the housing price and the sales volume as well as the causality relationship of them to make housing policies (e.g., housing sale activation or housing price stabilization) effective. This analysis subcategorized the nationwide market and evaluated the relationship between the housing price and the sales volume and the causality relationship between them. 2. The Domestic Housing Price and Sale Volume Status The nationwide housing sale price index was (2016 May). The nationwide housing sales price fluctuation rate increased by 41.8% from Jan 2006 to Jan It has increased except Especially it has shown an increasing trend through real estate recession and recovery period after showing a high increase (11.6%) in Recently the increasing trend 107

114 was expanded after 2013 August and it boomed nationwide in The increasing trend is slowed a little. The increasing trend is led by reconstruction of Gangnam apartments and apartments in Gyeonggi and Incheon adjacent to Seoul. On the other hand, the nationwide housing sales volume has staggered for a while since However, it has increased in high magnitude since the 2013 real estate activation policy. It was thousand in 2015, which was the highest since the sale volume statistics was first produced in However, the housing sales trade volume is on a decreasing trend since 2015 November because of off-season factor and the household debt management plan, which made more people take wait-and-see attitude. Table 3-11 Yearly housing price change rate (unit: %) Annual housing price change `06 `07 `08 `09 `10 `11 `12 `13 `14 `15 `16 rate Nationwide Capital area Regions Note: The annual change rate is the change rate among indices in December. The annual change rate of 2016 is the change rate of 2016 May versus 2015 December. Table 3-12 Yearly housing trade volume (thousand) and change rate (%) `06 `07 `08 `09 `10 `11 `12 `13 `14 `15 Nationwide trade volume (Annual change rate:%) 1, (-19.8) 890 (3.0) 870 (-2.6) 800 (-8.1) 980 (22.7) 740 (-25.1) 850 (15.8) 1010 (18.0) 1190 (18.8) Trade volume in the capital area (Annual change rate:%) (-30.8) 450 (-6.8) 400 (-12.1) 280 (-28.5) 370 (32.0) 270 (-27.1) 360 (33.5) 460 (27.3) 610 (32.4) Regional trade volume (Annual change rate:%) (0.2) 440 (15.2) 480 (7.0) 520 (8.9) 610 (17.6) 460 (-23.8) 490 (5.5) 540 (11.1) 580 (7.2) 108 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

115 P A R T 3 In-Depth Analysis The housing price change rate and the housing sale volume have a very similar trend as shown from the long-term time series figure <Figure 3-11>. One pattern of a factor occurs earlier or later than that of the other. It indicated that the housing price and the trade volume had a significant relationship. It also implied that the movement of the housing market can be predicted if we can clearly identify the relationship between the housing price and the trade volume. Therefore, the objective of this analysis is to identify the housing market trend by evaluating the correlation and the causality relationship between the housing price and the trading volume. Figure 3-11 Housing price and housing sale volume trends Price index and sale volume of nationwide Price change rate and sale volume of nationwide `06.1M `08.8M `11.3M `13.10M `16.5M Price index of nationwide (left) Sale volume of nationwide (right) -2 0 `06.1M `08.8M `11.3M `13.10M `16.5M Price change rate of nationwide (left) Sale volume of nationwide (right) 3. Analysis A. Data This analysis used 125 monthly data between Jan 2006 and May 2016 to analyze and the causality relationship between the housing price and the trading volume. The housing sales price index from KAB housing price trend survey was used as a factor representing the housing price and the housing sales trading volume by RTMS was used as a factor representing the trading volume. Each variable should satisfy the normality assumption for statistical analysis. Therefore, the housing price index was converted to the change rate of the housing price index (i.e., housing sales price change rate month over month) and the sales trading volume was converted to the trading rate (monthly housing sales trading volume 109

116 versus housing stock for sale). The ranges of analysis were restricted to nationwide, capital area, regions, and six metropolitan cities. B. Analysis Method and Model To evaluate the causality relationship and lagging relationship, the Granger causality test and the cross correlation test were conducted. Statistically speaking, the significant Granger causality means a variable is statistically useful to predict the other variable, unlike the common relationship indicating a variable is causing the occurrence of the other variable. The cross correlation test is a method to confirm the correlation by time step between time series data. The precedence correlation between two variables can be confirmed by this method. It is a technique to analyze whether two variables have a positive or negative relationship in different time step. It is a method to confirm if the movement direction of a variable is related to that of the other variable in a different time step, even if a variable cannot explain the movement of the other variable statistically through the Granger causality test Based on these analyses result, a vector autoregressive (VAR) model was used to analyze the causality relation between the housing price and the trading volume and the optimum trading volume was estimated based on them. C. Results of Analyzing Causality Relationship According to the results of the Granger causality test on the nationwide housing price and the trading volume, the changes in housing price influenced the housing sales volume. However, the housing trading volume did not affect the changes in the housing price. In other words, the changes in the housing price help to predict of the housing sales volume but the movement of housing trading volume does not help the housing price change prediction. The cross correlation analysis showed that the changes in trading volume preceded two months ahead of price change. They had a significant negative correlation (-0.33). It means that the housing trading volume does not explain the changes in housing price statistically but it can act as a leading indicator. In other words, if a trading volume increases as a leading indicator, we may predict the price decrease two months later. Contrarily, the decreased trading volume suggests the price increase two months later. For the case of the capital area, analysis results showed that the housing trading volume 110 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

117 P A R T 3 In-Depth Analysis influenced the housing price changes but the housing price changes did not affect the housing trade volume. Moreover, the housing trading volume proceded the housing price change rate by 2 months and there was a significant correlations (0.29). In other words, the increase in the housing trading volume increases the housing price 2 months later and the decrease in the housing trading volume tended to decrease the housing price. Like the nationwide results, regional results also showed that the changes in the housing price affected the housing trading volume but the housing trading volume did not influence the changes in the housing price. Moreover, the changes in price preceded the trading volume for 4 months. They had a significant positive correlation (0.20). It means that the price increase will lead the trading volume increases 4 months later and the price decrease follows by the housing trading volume decrease 4 months later. Housing submarkets showed various patterns between the housing price change rate and the housing trading volume. For Seoul, Incheon, and Gyeonggi, the housing trading volume influenced the changes in the housing price but the changes in housing price did not affect the housing trading volume. On the other hand, it was confirmed that the changes in the housing price influenced the housing trading volume but the housing trading volume did not affect the changes in the housing price for Busan and Ulsan. However, there was a bidirectional causality relationship between the changes in housing price and the housing trading volume in Daegu and Daejeon. Lastly, Gwangju showed no causality relationship between the changes in housing price and the housing trading volume. The interconnectivity and movement of the housing price and the trading volume varied by region. In capital area, Seoul, Gyeonggi, and Incheon, the housing price responded sensitively to the movement of the housing trading volume. It could be interpreted that the trading volume lead the price because the capital area had a relatively higher investment value, was sensitive to prince increase, and these areas had a higher demand than a demand. Therefore, it is believed that it will be effective to control the housing market by focusing on the housing trading volume rather than the housing price for developing housing policies in the capital area. Regional blocks, Busan, and Ulsan regions were analyzed to show that the housing trading volume had a small impact on the housing price but the trading volume responded to the changes in the price itself relatively sensitively. These regions have a higher supply than a demand. It took a relatively longer time to increase the price even there was a high trading 111

118 volume. Therefore, housing policies should focus on the housing price to make the housing trade be active and stabilize the market in these regions. 4. Optimum Trading Volume Analysis A. Results of Optimum Trading Volume Analysis The optimum housing trading volume was estimated by using a VAR model based on the relationship between the change rate of the housing sales price and the trading volume. The optimum trading volume means the optimum trading level suitable to the current market status based on a statistical model with considering the historical housing market trend. It was Figure 3-12 The optimum and actual trading volume of nationwide, capital area, and regional blocks Capital Area Regional blocks 150, , ,000 90, , ,000 30, , Housing sales price fluctuation rate (right, %) Optimum housing trading volume (left) Housing sales trading volume (left) Housing sales price fluctuation rate (right, %) Optimum housing trading volume (left) Housing sales trading volume (left) Nationwide 200, , ,000 50, Source: KAB Housing sales price fluctuation rate (right, %) Optimum housing trading volume (left) Housing sales trading volume (left) 112 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

119 P A R T 3 In-Depth Analysis used as an index evaluating if the current actual trading is within an optimum range. The results showed that the actual trading volume moved similarly to the optimum trading volume between 2006 and 2011 in the nationwide. However, the actual trading volume was lower than the optimum in the most of the intervals between 2011 and the second half of 2013 because of a real estate recession. From the second half of 2013 to 2015, actual trading volume was much higher than the optimum. As the household debt management policy began to be effective recently, the trading volume decreased to make the actual lower than the optimum trading volume. For capital area the actual trading volume was very similar with the optimum trading volume. This means that the trading volume has been optimum regardless of the real estate market condition. In the regional blocks, the actual trading volume was mostly lower than the optimum trading volume during the most of the time. However, it exceeded the optimum trading volume for an extended time from 2014 to the second half of It indicated that the sales trading was activated. Recently, more people are watching the market without making an action due to reinforced loan regulation. In the capital area, trading began to recover the optimum trading volume after 2016 March and show the indication of market activation. However, regional blocks have not recovered the optimum trading level. The decoupling phenomenon is getting worse. 5. Conclusions and Implications This study analyzed how the relationship and the causality relationship between the housing sales price and the trading volume varied by region. Results showed that the relationship and the causality relationship between two variables varied by the nationwide, capital area, regional blocks, and sub-categorical areas. Therefore, it is important to recognize the differences among the housing market by region and approach it according to predict the movement of the housing market and handle it in advance. For the capital area, housing policies should focus on the housing trading volume for the stabilization of the housing price to be effective. For the regional blocks, focusing on the housing price can bring an effective result and it will run a trading activation policy effectively. 113

120 KAB Real Estate Market Report

121 Korea Real Estate Market Report P A R T 4 Issue Analysis Trend in Transaction Volume and Transaction-Based Real Estate Price Index of Town House and Multi-Housing Changes in Building Construction Standards and Trends in Price of Officetel Recent Household Debt Status and Structural Changes Market Trends and Outlook of Logistics Real Estate

122 Trend in Transaction Volume and Transaction-Based Real Estate Price Index of Town House and Multi-Housing Kim Minsup There has been a recent increase in transaction volume of Town House and Multi-Housing for the investment and residential purpose in accordance with the impact of housing burdens such as the rising prices of Apartments and Jeonse (a long-term lease) as well as low interest rates. As the transaction volume of Town House and Multi-Housing has been growing, the Korea Appraisal Board announced the Transaction-Based Real Estate Price Index for Town House and Multi- Housing starting from June 15, 2016 in order to correctly grasp the trends of actual transaction. Transaction-Based Real Estate Price of Town House and Multi-Housing showed a rapid rising in price from the period of `06 to `08 where the Transaction-Based Real Estate Price Index were aggregated, however, it showed a modest increase in price since the global financial crisis in `13. During the period of `06 ~ `08, the Suburban areas (Seoul Metropolitan and surrounding region) led the price rising with the favored urban redevelopment such as Newtown and investment demand influence, etc., During the period of `10 ~ `13, the regional areas remained strong following supply and demand imbalance due to supply shortages and the development projects such as innovation cities, however, the Suburban areas and regional areas are rising together due to dealing transition since ` Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

123 P A R T 4 Issue Analysis Change in Transaction and Inventory Volume of Town House and Multi-Housing Recently, the transaction volume of Town House and multi-housing has been increasing due to a rise in Apartment sales and Jeonse. In particular, the sales prices of Apartments and the price of Jeonse are 4.8% and 7.0% higher than the overall housing price flotation rate respectively year-on-year (YoY) based on `15. Owing to the housing burden following rising price of Apartments etc., the transaction volume of Town House and Multi-Housing has been increasing since `13 and increased by 33.5% YoY in `15 and was twice higher than the YoY growth rate of trade. Table 4-1 Yearly flotation rate of housing price (unit: % YoY) Division Full house sale prices Full house Jeonse price Apartment sales prices Apartments Jeonse price Source: Korea Appraisal Board, Nationwide Survey on Housing Price Trend Table 4-2 Yearly flotation rate of transaction volume of Town House and multi-housing (unit: % YoY) Division Apartment transaction volume Town House and Multi-Housing transactions volume Source: Ministry of Land, Infrastructure and Transport, Real Estate Transactions Status Statistics In addition, the transaction volume of Town House and Multi-Housing with the area of 60m² or below has been increasing due to the impact of 1-2 member households and interest rate cuts etc. Owing to the recent influence of increasing 1-2 member households and low interest rate, the transaction volume of Town House and Multi-Housing with less price burden than 117

124 Apartments has been rising, therefore, the transaction volume of Town House and Multi- Housing with the area of 60m² or less has been relatively increasing rapidly. Table 4-3 Yearly transaction volume of Town House and multi-housing per size (unit: % YoY) Division Transaction volume of 60m² or below Transaction volume of over 60m² Source: Ministry of Land, Infrastructure and Transport, Actual Transaction Data of Town House and Multi-Housing Table 4-4 Yearly market interest rate changes (unit: % YoY) Division Market interest rate (3-year exchequer bond KTB) Source: Bank of Korea Table 4-5 Nationwide trend in number of household members Division 1-2 member household 3 member household 4 member household 5 member household or more Source: Ministry of Land, Infrastructure and Transport, Actual Housing State Survey Total (unit: %) Viewing by the unit of 5 years since `06, the inventory growth rate of Apartment was higher than that of Town House and Multi-Housing with 20.6% increase while the inventory growth rate of Town House and Multi-Housing was higher with 20.6% than that of Apartment (13.5%). The nationwide inventory volume of Apartment is 9,610,474 while that of Town House and Multi-Housing was 2.389,180 showing that Apartment has four times higher rate of inventory. Looking at the growth rate of inventory in ` `16 compared to that of `06, Apartments showed 36.9% while Town House and Multi-Housing showed 30.0%. 118 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

125 P A R T 4 Issue Analysis Table 4-6 Volume and flotation rate of inventory per type in the past five year period (unit: No. of households, %) Region Housing type Nationwide Suburban area Regional area Apartment Town House and Multi-Housing Apartment Town House and Multi-Housing Apartment Town House and Multi-Housing 7,020,456 8,468,762 (20.6) 1,837,698 1,960,514 (6.7) 3,366,307 4,104,214 (21.9) 1,280,587 1,378,233 (7.6) 3,654,149 4,364,548 (19.4) 557, ,281 (4.5) 9,610,474 (13.5) [36.9] 2,389,180 (21.9) [30.0] 4,611,731 (12.4) [37.0] 1,686,290 (22.4) [31.7] 4,998,743 (14.5) [36.8] 702,890 (20.7) [26.2] Note: What`s inside the parenthesis in 2011 represents the flotation rate YoY 2006, in 2016 YoY 2011, and what`s inside [ ] represents the flotation rate YoY 2006 Source: Korea Appraisal Board, House of Commons published volumes In the inventory growth rate of Town House and Multi-Housing in `16 YoY `11, Town House and Multi-Housing showed higher rate (21.9%) than Apartments (13.5%) whereas the inventory growth rate in the Suburban area was 22.4% and in the regional area was 20.7% during the same period. Looking at the yearly flotation rate of inventories, the growth rate of Town House and Multi- Housing was higher than that of Apartment The inventory volume of Apartments as well as Town House and Multi-Housing has been increasing every year, and the yearly growth rate of the inventory volume of Apartments was higher than that of Town House and Multi-Housing from `07 to `11 while the reverse was true since `11 With `13 as a turning point, the yearly inventory growth rate of Town House and Multi- Housing has been decreasing, however, still higher than that of Apartment. 119

126 Figure 4-1 Nationwide yearly change in flotation rate of inventory volume per type Apartment Town House and Multi-Housing (unit: YoY, %) Source: Korea Appraisal Board, Published Volumes of Apartment House Looking at the recent yearly inventory flotation rate in Suburban and regional areas, the regional areas showed higher growth rates from `13 to `14 while the Suburban area showed higher growth rates since ` Figure 4-2 Change in flotation rate of yearly inventory volume of in suburban and regional sreas (unit: YoY, %) Suburban area Source: Korea Appraisal Board, Published Volumes of Apartment House Regional area Publication and Trend of Transaction-Based Real Estate Price Index of Town House and Multi-Housing Korea Appraisal Board recently announced the Transaction-Based Real Estate Price Index of Town House and Multi-Housing to accurately determine the actual transaction price trend as the transaction volume Town House and Multi-Housing increased. It started announcement since June 15, `16 after the approval of the National Statistical Office by expanding and reforming depending on the type of Transaction-Based Real 120 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

127 P A R T 4 Issue Analysis Estate Price Index limited to Apartments at that time. Transaction-Based Real Estate Price Index for Town House and Multi-Housing was prepared using a repeat sales model based on Transaction-Based Real Estate Price, was announced monthly at national, Suburban, and regional level while quarterly as far as Seoul, Incheon, and Gyeonggi as approximately 70% of the inventory volume of Town House and Multi- Housing (see Table 4-6) The Transaction-Based Real Estate Price Index for Town House and Multi-Housing showed a rapid price hike from `06 to `08 when the Transaction-Based Real Estate Price was aggregated, however, it showed gradual price rising since the global financial crisis in `13. It showed a rapid price hike from `06 to `08, m years has shown a drastic price rise, rose due to the deregulation and expectation in economic recovery after the global financial crisis, however, showed a long-term reduction till `12 following strengthened financial regulation and real estate recession. Since `13, it showed a modest rising trend of price due to a steady rising due to the real estate policy etc. of the government Figure 4-3 Monthly trend of Transaction-Based Real Estate Price Index of Town House and multihousing 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% `06.1 `07.1 `08.1 `09.1 `10.1 `11.1 `12.1 `13.1 `14.1 `15.1 ` Flotation rate (MoM,%), left Index ( =100), right 121

128 As the recent demand for relatively more affordable Town House and Multi-Housing grows due to the recent rising transaction price etc. of Apartment, their price showed a similar increase to that of Apartments (4.3%) in the first quarter of representing a rise of 4.4% The rate of price rise of Town House and Multi-Housing was much higher than that of Apartments from `06 to `08, however, the rate of price rising of Apartments became much higher than the Town House and Multi-Housing reversing the situation. The price of Town House and Multi-Housing started its reversing from falling to rising, it pursued the price growth (6.5%) of Apartment in `15 with a significant rising to 5.5%, and rose higher than that of Apartment (4.3%) in 1Q in `16 with 4.4%. Figure 4-4 Monthly trend of Transaction-Based Real Estate Price Index per type and yearly flotation rate % `06.1 `07.1 `08.1 `09.1 `10.1 `11.1 `12.1 `13.1 `14.1 `15.1 ` % 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -.5.0% -10.0% Flotation rate of sales price of apartment (RHS) Apartment index (LHS) Flotation rate of sales price of town house and multi-housing (RHS) Town house and multi-housing index (LHS) Table 4-7 Yearly flotation rate per type (unit: Flotation Rate of Transaction-Based Real Estate Price Index,%) Division Q Town House and Multi Housing Apartments Note: However, it shows MoM (Jan) flotation rate in 2006, YoY (Year-end) flotation rate in , and the flotation rate until 1Q in Source: Korea Appraisal Board, Transaction-Based Real Estate Price Index and Town House and Multi-Housing 122 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

129 P A R T 4 Issue Analysis It started to show a rising trend of falling of Suburban-rising of regional areas, and an accompanied rising since `14 The price of Town House and Multi-Housing showed a rapid price hike due to the impact of urban redevelopment and investment demand such as Newtown during the period of `06~08, strength in regional areas due to the supply-demand imbalance following a lack of supply and development projects such as innovative city etc. during the period of ` 10-13, and accompanied rising of the Suburban and regional areas due to the dealing transition following a price hike of Apartment since `14. - With `14 as a turning point, the Suburban area started its recovery, began to rise along with the regional areas rising by 1.8% in 1Q `16 to reverse the growth rate of price of regional area (0.3%). On the basis of Mar. `16, the Suburban area dropped by 15.2% compared to the August `08 peak (213.8), the regional areas increased steadily due to the impact of localized development projects etc., updated the peak value with in Mar. `16, and increased by 85.5% in comparison to the initial implementation point (100.0) of the Transaction-Based Real Estate Price System in `06. Figure 4-5 Monthly Transaction-Based Real Estate Price Index and flotation rate of suburban and regional Town House Rising in Suburban area - Redevelopment and investment demand including Newtown 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% Rising in regional areas - Shortage in supply, developmental projects including urban innovation Accompanied rising - Alternatives due to the rising price of low interest rate Apartments -4.0% -6.0% 80.0 `06.1 `07.1 `08.1 `09.1 `10.1 `11.1 `12.1 `13.1 `14.1 `15.1 ` % Suburban area regulation (LHS) Suburban area index (RHS) Regional flotation rate (LHS) Local area index (RHS) 123

130 Table 4-8 Yearly flotation rate of Transaction-Based Real Estate Price Index by region Division Q Suburban area Regional area Five metropolitan area Regional 8 provinces Note: However, it shows MoM (Jan) flotation rate in 2006, YoY (Year-end) flotation rate in , and the flotation rate until 1Q in Source: Korea Appraisal Board, Transaction-Based Real Estate Price Index and Town House and Multi-Housing (unit: %) In terms of size, the price of Town House and Multi-Housing with the area of 60m²or below increased since `14 due to a recent increase in 1-2 member household and lower interest rate. The price rise of Town House and Multi-Housing with the area of 60m² or below was stronger than that of Town House and Multi-Housing with the area of over 60m² until `09, however, the rate of the price rise of Town House and Multi-Housing with the area of over 60m² exceeded the other since `10 The price of Town House and Multi-Housing with the area of 60m² or below began to rise from `14, and increased by 1.4% in the first quarter in `16 to show the higher rate of the rate of price rise than the Town House and Multi-Housing with the area of over 60m². Figure 4-6 Yearly flotation rate of Transaction-Based Real Estate Price Index by size m² or below over 60m² 124 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

131 P A R T 4 Issue Analysis Changes in Building Construction Standards and Trends in Price of Officetel Kim Minsup, Lee Jinok Officetel is a compound word of Office (Office) and hotel (Hotel), refers to a building where the function of business and residence coexist, has been recently reinforced in residential features such as designation of semi-housing by an amendment in Housing Act Enforcement Decree, allowing floor heating, deregulation of business area ratio in the bathroom and private area etc. The supply quantity of Officetel has been drastically changing depending on the stricter regulations or deregulation as residential housing by sensitively reacting to government policies and regulations, about 81% of total Officetel are concentrated in the Suburban area, and 91.8% of them are for residential purpose. Since the supply of small-sized Officetel increased recently due to the changes such as reinforcing of residential purpose and increasing number of 1-2 member household, the Officetel with the size of accounted for 69.1% of the total Officetel. The price of Officetel started dropping from 2012 due to an oversupply following the reinforcing of residential functions such as allowing floor heating and the designation of semi-housing, however, it was converted to rise from 2015 due to the dealing transition demand caused by low interest and rising Apartment price, in addition, the proportion of Jeonse compared to sales price reached 87% in 1Q, 2016 due to steadily increasing Jeonse price. The transaction volume of Jeonse and monthly rent has been growing every year, and as the proportion of monthly rent transaction has been increasing, the transaction volume of monthly rent came from behind that of Jeonse around Even though the rental yield rate of officetel had been decreasing each year, it still shows a higher rate of return than the market rate and in terms of size, the rental yield rate of officetel with the size of 40m² but showed the highest rental yield and demand. It is necessary to have DB Maintenance and Construction as well as trend surveys by the accurate sample design based on the DB Maintenance and Construction avoiding the ambiguity of the definition of mother population and sample, representativeness, reliability etc. 125

132 Changes in Building Construction Standards and Supply of Officetel Officetel is a compound word of Office (Office) and hotel (Hotel), and its basic feature is that it is a building where the function of business and residence coexist. Its legal definition is a building that is mainly for working classified as a business facility in the type of application-specific buildings in the Annex 1 of Building Act Enforcement Decree and where room and board are also possible in some compartments for presale or renting, which is suitable for the criteria notified by Minister of Ministry of Land, Infrastructure and Transport work. The word Officetel began to be used in the application-specific buildings in Annex 1 of the Building Act Enforcement Decree on March 1, `88 and was defined as the place where residence is possible in each individual room in the facilities mostly for business. The supply volume of officetel has been changing according to the stricter regulations or deregulation on housing purpose related floor heating, work ratio percentage etc. responding sensitive to government policies and regulations. Notification of `88 in <Table 4-10> regulated the cases of building officetel with residential features by dividing office building into several spaces, however, the regulation became mitigated in `95 in order to relieve the inconvenience of users due to insufficient usage due to excessive regulation. The supply volume of officetel that has been poor until `01 began to grow from `02 and rapidly grew to 85,313 units by `04. It is believed to be due to rising housing prices and low interest rates during that period However, as the real estate market became overheated and Officetel was supplied indiscriminately for residential purpose, the part of business area was raised to 50% 70%, and heating facilities such as floor heating, hot water floor heating, or a heater were prohibited in `04 - The number of approval of use (based on unit) is decreased by 51% from 85,313 units in `04 to 41,414 units in `05, and afterwards a long-term low supply followed due to real 126 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

133 P A R T 4 Issue Analysis estate recession caused by the global financial crisis of `08. From `06 to`09, in order to enable the supply of officetel by mitigating some of its building construction standards, the allowed private area for floor heating was mitigated from 50m² 85m², and the bathroom area was mitigated from 3m² 5m². In 2010, the rising Joense price and the number of 1-2 member households led to strengthening the residential feature of Officetel by removing the regulation on bathroom and work area among the private area in the notification of the Ministry of Land, Infrastructure and Transport and by specifying Officetel semi-housing by an amendment in Housing Act Enforcement Decree etc. In 2011, a policy was announced to allow Officetel for rental housing projects in terms Table 4-9 Yearly use approval no. and YoY flotation rate Unit 6,088 12,942 19,418 36,484 YoY Flotation Rate 12.3% 112.6% 50.0% 87.9% Figure 4-7 Yearly trend of use approval no. of officetel (unit: 1,000 units) Floor heating prohibition Work area ratio raised Floor heating deregulation Semi-housing specification Rental housing registration availablability `98 `99 `00 `01 `02 `03 `04 `05 `06 `07 `08 `09 `10 `11 `12 `13 `14 `15 Data: Korea Appraisal Board Reference Price DB, Suburban and Metropolitan Area Standards 127

134 Table 4-10 Construction standards change in ministry of land, infrastructure and transport notification Notification day Working area among private area At least 70% At least 70% At least 50% At least 70% At least 70% At least 70% At least 70% Unlimited Unlimited Unlimited Heating equipment Heating equipment by floor heating/hot water floor heating prohibited Deleted Deleted Heating equipment by floor heating/hot water floor heating/ electric heater prohibited Floor heating allowed for the private area of 50m² or less Floor heating allowed for the private area of 60m² or less Floor heating allowed for the private area of 85m² or less Floor heating allowed for the private area of 85m² or less Floor heating allowed for the private area of 85m² or less Floor heating allowed for the private area of 85m² or less Bathroom prohibited Bathroom with bathtub prohibited Bathroom with bathtub prohibited Prohibited At most one bathroom, bathtub prohibited At most one bathroom, bathtub prohibited At most one bathroom, bathtub prohibited Bathroom area Toilet 1.5m² or below Balcony Prohibited - Prohibited - Prohibited At most one bathroom, bathtub prohibited Over 3m² prohibited Over 5m² prohibited Over 5m² prohibited Over 3m² prohibited Prohibited Prohibited Prohibited Unlimited Unlimited Prohibited Unlimited Unlimited Prohibited Unlimited Unlimited Prohibited Other Private exit installation deregulated Calculation of private area based on the internal lines of the building outer wall Source: Ministry of Land, Infrastructure and Transport Notification, Survey on Korea Appraisal Board Assessed Prices and Calculation Operation Outline 128 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

135 P A R T 4 Issue Analysis of increasing the supply for the stabilization of residence for ordinary people and Jeonse and monthly market, and it became possible to register the Officetel with the private area of 85m² or more, a private standing kitchen, flush toilet and bathing facilities as rental property due to an amendment in Rental Housing Act Enforcement Decree. - Therefore, the residential functionality of officetel was enhanced due to removing the regulation on work area among the private area (`10), designation as semi-housing (`11), and registration availability as rental housing for purchase ( `11) etc. - Consequently, the supply of Officetel shows a rapid increase of about six times from 6,088 in `10 to 36,484 in `13. Looking at the trends of supply by region, the ratio of Officetel supplied to Metropolitan Area has been growing recently separately from the supply trend led by the Capital area in the early `00s. The supply of Officetel in Capital area was 5,466 in `00, however, increased 14 times the supply rate in `00 with 79,284 units in `04, during the same period the supply trend of local Figure 4-8 Yearly trend in officetel approved for use (unit: unit) 90,000 80,000 77,212 70,000 60,000 53,974 50,000 40,000 35,408 30,000 20,000 10, ,932 7,626 7,664 7,568 8,101 5,466 3,769 3,874 1,068 1, ,178 24,223 16,090 14,341 12,775 11,002 9,373 10,306 12,907 6,006 4,438 5,426 4,461 5,349 6,643 3,569 3,936 1,934 2, `98 `99 `00 `01 `02 `03 `04 `05 `06 `07 `08 `09 `10 `11 `12 `13 `14 `15 Capital area local Metropolitan city 129

136 Metropolitan Cities was similar to the flotation pattern of the Capital area showing five times increase compared to `00 with 8270 units in `04, however, the total supply volume remains at about 10% of the Capital area. The supply of Officetel has been steadily increasing after `10 when deregulation was made, and in `14, 24,223 units were supplied in the Capital area while 12,907 units in local Metropolitan Cities showing an increase up to 53% of the Officetel in Capital area. In `15, the supply volume in both Capital area and local Metropolitan City decreased, the local areas showed about 30% of the supply volume to the Capital area (14,341 units) with the supply of 3,936 units. In addition, the changes such as residential function enhancement of Officetel and increase in 1-2 member households have expanded the supply of small Officetel. Until `09, there have been many cases of use approval for the Officetel with the area over 60m², but from `10 a recent date, the number of use cases of the Officetel with the area of 40m² or less have been rapidly increasing to speak for the rising supply volume of smallsized Officetel according to the strengthened residential function. - In `09, the cases with the area of 40m² or less approved for use accounted for 30.1% of the total with 1,668 units, however, accounted for 82% of the approval cases with 30,000 units in `13. Table 4-11 Nationwide trend in weighted no. of household members (unit: %) Division member household member household member household or more member household Sum Source: Ministry of Land, Infrastructure and Transport, Housing Survey Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

137 P A R T 4 Issue Analysis Figure 4-9 Trend in officetel approved for use by size (unit: unit) 35,000 30,000 30,000 29,970 25,000 20,000 15,000 14,730 13,769 10,000 10,121 7,951 8,313 7,694 5, ,466 3,673 3,077 1,535 2,732 3,327 3,833 2,456 2,983 2,245 2,750 2,218 2,498 2,706 2,811 1,546 1,156 1,668 1,982 2,009 2,499 1, m² or less Over 40m² or 60m² or less Over 60m² Officetel Status Base on `15 inventory of the Officetel in the Capital area and five Metropolitan City, Capital area showed 369,891 units (194,076 units in Seoul, 41,065 units in Incheon, and 134,750 units in Gyeonggi) showing approximately 81% of the total Officetel is concentrated in the Capital area As for the ratio of the inventory of Officetel by region, Seoul was the highest in the Capital area with 42.6%, and Busan was the highest in five Metropolitan Cities with 12.9%. 131

138 Figure 4-10 Inventory ratio of officetel by region (based on unit) (unit: %) Seoul Incheon Gyeonggi Busan Daegu Gwangju Daejeon Ulsan As for the status of Officetel by purpose, the residential purpose occupies 91.8% of the total 455,484 with 417,915. As for the inventory volume of Officetel for residential purpose, Seoul accounted for 41.0% of the total residential Officetel with 171,250 units while the inventory volume of Officetel for work purpose accounted for 60.8% of the total work purpose Officetel with 22, 826 units. 97.8% of the inventory of Officetel in Gyeonggi Province is for residential purpose Officetel representing the highest proportion of residential Officetel among the Capital area and five Metropolitan cities. As for the Officetel status per size, Officetel with the area of 40m² or less accounted for 69.1% of the total with 314,811 units. As for the Officetel with the area of 40m² or less and over 40m² or 60m² or less, Seoul shows the largest inventory among the total inventory with143,598, 26,961 respectively, and in the case of over 60m², Gyeonggi represents the largest inventory with 23, Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

139 P A R T 4 Issue Analysis Table 4-12 Officetel status by region and by purpose (based on unit) City & Province Seoul Busan Daegu Incheon Gwangju Daejeon Ulsan Gyeonggi Work purpose Residential purpose Sum Inventory volume Ratio (%) Inventory volume Ratio (%) Inventory volume Ratio (%) 22,826 (60.8%) 2,941 (7.8%) 615 (1.6%) 5,822 (15.5%) 527 (1.4%) 1,618 (4.3%) 283 (0.8%) 2,937 (7.8%) ,250 (41.0%) 55,651 (13.3%) 5,282 (1.3%) 35,243 (8.4%) 5,556 (1.3%) 9,303 (2.2%) 3,817 (0.9%) 131,813 (31.5%) , , , , , , , , Full 37, , , Source: Korea Appraisal Board Officetel Status Survey, the ratio of column total within parenthesis Table 4-13 Officetel status by region and by size (based on unit) City & Province Inventory volume 40m² or less Over 40m² or 60m² or less Over 60m² Sum Ratio (%) Inventory volume Ratio (%) Inventory volume Ratio (%) Inventory volume Ratio (%) Seoul 143, , , , Busan 42, , , , Daegu 3, , , Incheon 23, , , , Gwangju 4, , Daejeon 6, , , , Ulsan 1, , , Gyeonggi 88, , , , Full 314, , , , Source: Korea Appraisal Board Officetel Survey 133

140 Officetel Price Trends The Officetel whose price had been going up until `11 indicated a price decline until `14 due to increased supply, however, it was reversed from `15 to rising trend, and the ratio of Jeonse cost to sale prices recorded 87% in 1Q of `16 due to rising Jeonse price. Officetel sales price showed a rising trend until `11, however, began to fall from `12 due to the supply increase following the strengthening of residential function such as deregulations like allowing floor heating, housing designation and rental housing registration availability. Owing to the dealing transition demand due to low interest rates and price hike of Apartments, the Officetel sales price was converted to rising from `15, however, the pace of rising has been decreasing since 1Q of `15. - In particular, the interest as a revenue product has been increasing due to the low interest rate, and the acquisition tax and property tax benefits under the Act on Local Tax Exemption apply till `18. In contrast, as Jeonse price went up higher than sale price, Jeonse cost ratio has been gradually rising to record 80% in 3Q of `13 and 87% in 1Q of ` Figure 4-11 Quarterly sales prices and changes in Jeonse cost ratio `10.1Q 3Q `11.1Q 3Q `12.1Q 3Q `13.1Q 3Q `14.1Q 3Q `15.1Q 3Q `16.1Q Price Change Rate (RHS) Officetel Price (2010.1Q=100, LHS) Note: Trend of Transaction-Based Real Estate Price based on the same complex and the same area `11.1Q 3Q `12.1Q 3Q `13.1Q Q `14.1Q 3Q `15.1Q 3Q 87 `16.1Q Comparing Jeonse cost ratio with other types of housing, the Jeonse cost ratio of Apartments rose from 67% in `13 to 74% in 1Q of `16 while the Jeonse cost ratio of Town 134 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

141 P A R T 4 Issue Analysis House and Multi-Housing rose from 62% in `13 to 66% in 1Q of `16. The Jeonse cost ratio of Officetel has been maintained at the higher level than this. Figure 4-12 Change in Jeonse cost ratio by housing type Q Apartment Town house Officetel Source: Korea Appraisal Board Change in Officetel Rental Earnings Rate In the middle of supply increase trend of Officetel, the trading volume of Jeonse and monthly rent has been on the rise every year, especially the trading volume of monthly rent was reversed from `13 as a turning point. Figure 4-13 Yearly trend in transaction volume of Jeonse and monthly rent (unit: unit) 35,000 33,131 30,000 26,784 25,000 20,000 15,000 14,755 12,614 15,827 15,563 21,313 17,791 20,508 21,019 10,000 5, Jeonse Monthly rent Source: Ministry of Land, Infrastructure and Transport actual transaction data of Officetel 135

142 Comparing the volume of Jeonse and monthly rent in the Capital area and local area, the proportion of monthly rent came from behind the Jeonse proportion starting from `13 as a turning point in the Capital area whereas the proportion of monthly rent is higher than Jeonse proportion growing steadily every year. Figure 4-14 Comparison of transaction volume and transaction proportion trend of Jeonse and monthly rent in the metropolitan and local areas (unit: %) Metropolitan area Jeonse and monthly rent proportion trend Local area Jeonse and monthly rent proportion trend Monthly rent Jeonse Source: Ministry of Land, Infrastructure and Transport actual transaction data of Officetel Monthly rent Jeonse In the middle of rising proportion of monthly transaction due to low interest rate, the comparison of Officetel rental earnings rate using the Transaction-Based Real Estate Price shows still high earnings rate compared to market interest even if the earnings rate has been falling each year. Since the Capital area has been obtaining much more supply volume than local areas, it represents rental earnings rate of 5.0% based on `15 as compared to rental earnings rate of 5.3% in the local region. As for the size of rental earnings rate, the Officetel with the area of 40m² or less showed highest earnings rate, however, the earnings rate decreased every year to show a decrease of 1.8% in `15 YoY `11. The rental earnings rate of the Officetel with the area of 40m² or less showed a tendency to decrease yearly, however, the Officetel with the area of 40m² or less is determined to have high demand showing the higher rate of increase etc. than other size. 136 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

143 P A R T 4 Issue Analysis Figure 4-15 Comparison between officetel earnings rate and market interest rates (unit: %) Nationwide Capital area Local area Market interest rates (3-year KTB) Note: Officetel actual transaction data was used for monthly earnings rate, and monthly earnings rate = (monthly rent * 12)/(sales price - the rent deposit) and is calculated by assuming the case with no loan. Figure 4-16 Comparison of officetel earnings rate by size 8.0 (unit: %) m2 or less m2 over 60 m2 137

144 Table 4-14 Yearly transaction volume of monthly rent of officetel (unit: number of cases, YoY %) Contract year 40m² or less 40-60m² over 60m² ,421 1,730 1, ,851 (25.8) 2,031 (17.4) 1,689 (15.3) ,798 (41.7) 2,660 (31.0) 1,869 (10.7) ,981 (30.9) 2,778 (4.4) 2,062 (10.3) ,716 (26.1) 3,281 (18.1) 2,533 (22.8) Source: Ministry of Land, Infrastructure and Transport actual transaction data of Officetel Suggestions for Identifying Officetel Trends Currently, there is no official statistics with national approval regarding Officetel, and there is a need for authoritative statistics by improving the existing statistics since the statistics is vague in the definition of population and sample, representativeness and reliability. Officetel show differences depending on the size and the price difference according to the business and residential division, and its supply was extended in Local areas as well as the Capital areas due to an expanded interest in Officetel as earnings product following low interest rates. In private sector, only the sales price and Jeonse price are being announced except for monthly rent as far as Seoul, Incheon, and Gyeonggi region are concerned, or the statistical meta information regarding population, sample, and statistical preparation methods is lacking. It is necessary to conduct Trend Survey by correct sample design based on DB maintenance and building regarding quasi dwelling such as Officetel. Since the residential function of Officetel has been greatly reinforced, there is a need to offer the information on Officetel which is accurate and applicable to the Government and general public by producing a variety of statistical indicators on sales marketing, Jeonse, monthly rent etc. by size, purpose, and region. 138 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

145 P A R T 4 Issue Analysis Recent Household Debt Status and Structural Changes Min Chulhong In the middle of emerging voice of additional interest rate cut within a few weeks after a standard interest cut last month whereas the three-year government bond interest rate was lower than the standard interest, Government showed its will to manage household debt and real estate markets while announcing collective loan regulations on June 28, `16. The household debt rose to approximately 118 trillion KRW during the year `15, in particular, the size of increase in 1Q of `16 reached KRW 20.6 trillion or more recording the biggest debt in history with the total household debt over quadrillion KRW. Looking at the household debt in structure, the content of household debt appeared to be improved as follows, lump sum loan was decreased based on `15, there was 38.9% increase in non-lump sum and amortization loans, flotation rate loans are reduced, fixed rate loans have been increasing by 35.7% and the mortgage delinquency rate appeared to be consistently getting lower recording 0.27% at the end of `15. Differently from this improvement in the content of household debt, there is a need to note a right function that the structural improvement would bring such as loan total management and securing lending margin due to an increase in non-lump sum loans instead of talking only in terms of the burdens in the housing market. It is expected that Government s regulation on group lending in medium and long term will bring the stabilization of housing market due to the strengthening of soundness. Total household debt (Bank of Korea household credit total) recorded a ` quadrillion KRW in 1Q of `16. Recently, the growth of household debt was expanded by 8.7% in `11, 5.2% in `12, 5.7% in `13, 6.5% in `14 and 11.2% in `

146 Comparing an increase of about 121 trillion KRW for one year in `15, 41.1 trillion KRW in 4Q only in `15, an increase of 66.2 trillion KRW in size for one year in `14 and an increase of 61.8 trillion KRW in `10 - `14 on average, the growth rate of total household debt in `15 exceeded that of previous years. The trend of rapid growth in household debt broke out in `15 due to the factors such as a boom in the housing market and expansion of loan demand due to low interest rates, in particular, increased trade following increased pre-sale orders in 4Q `15, and pre-demand before the enforcement of household debt management measures. Table 4-15 Flotation and balances in household credit Division Amount of flotation `14 Flotation rate Amount of flotation `14.4Q Amount of flotation `15 Flotation rate Amount of flotation `15.4Q Balance at end of `15 Amount of flotation 1Q (unit: trillion KRW,%) `16 `16.1Q balance Household credit 66.2 (6.5) (10.9) Household loans 64.5 (6.7) (11.0) Mortgage loans 45.7 (8.7) (13.8) Other loans 18.8 (4.3) (9.1) Sales credit 1.7 (2.9) (8.2) Source: Bank of Korea The group lending balances continued to rise in January `16 to trillion KRW, the increased amount in group lending group in `15 was 8.8 trillion KRW above the increase level of the previous year. Since the group lending is being carried out divided into several interim payment, it is structured such that loan balance will continuously increase if there are lots of the past presale volume. Even if group lending has been significantly increased due to the greatly increased pre-sale volume in `15, the group lending are forecasted to be stably operated in the future due to the recent voluntary risk management by the banks. If the housing price at the completion time falls below the pre-sale price, careful risk management is needed because a variety of conflict can be caused such as cancellation of 140 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

147 P A R T 4 Issue Analysis pre-sale contract. Table 4-16 Trends in group lending (unit: trillion KRW) Increase (trillion KRW, %) `12 `13 `14 `15 compared to the May `16.1 end of `14 Bank mortgage Loans Group Lending Interim Payment Moving Cost Balance Source: Financial Services Commission press release In the end of June, `16 Second Half Economic Policy Direction` announcement included the regulatory information on group lending. In order to calm the regions including Seoul Gangnam, Gyeonggi Gwacheon, Daegu Suseong-gu, and Busan Haeundae which show hot fever in recent reconstruction and pre-sale market through group lending regulation, interim credit guarantee system was determined to be improved regarding the group lending which was excluded from the Credit Screening Advancement Guideline. This action is expected to dampen the speculative demand sentiment by specifying the credit limit of 600 million KRW in the Capital area and Metropolitan cities, 300 million KRW in local area within the warranty limited to two housing and by making it impossible for the housing worth 900 million KRW to get warranty. In addition, it is expected that the rate of increase in group lending which accounts for most of the increase in household debt is slowing down to some extent to make housing loan management easier in the future. Owing to the steadily rising amortization and fixed rate loan recording 38.9% and 35.7% respectively at the end of `15 due to a constant effort of household debt relief by the Government such as `Relief Conversion Loans` in `March, 15`, the possibility of insolvency is gradually getting lower. 141

148 The possibility of securing the additional lending potential of the end-users of housing is getting higher due to the circulation of funds in accordance with the debt secured in addition to the management of total amount of household loan followed by an increase in the proportion of non-lump sum and amortization loans, Increasing fixed-rate loan has a right function of enabling a long-term and planned management of households as well as the avoidance of interest rate fluctuation risk. It seems like that Government s management of household loan has been appropriately made as can be seen from the fact that the mortgage delinquency rate has been lowered and the debt structure has been improved. The structural risk has been gradually lowered as the delinquency rate of housing mortgage has been constantly being reduced to 0.27% in `15. Table 4-17 Delinquency rate of mortgage loan (unit: %) Delinquency rate Figure 4-17 Growth rate of household debt Figure 4-18 Changes in structure of household debt (unit: %) (unit: %) `10 년 `11년 `12년 `13년 `14년 `15년 `10년 `11년 `12년 `13년 `14년 `15년 Household credit Mortgage loan Non-lump sum, Amortization Fixed-rate interest Source: Statistics Source: Financial Supervisory Service 142 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

149 P A R T 4 Issue Analysis Implication The household debt balance recorded its highest where about a half of it was accounted for mortgage loans, and a significant portion of this increase in mortgage loans was accounted for an increase in group lending. Even if the group lending increased rapidly in `15 due to the impact of the increased transaction volume according to rising pre-sale volume, it is determined to be stably run in the future due to the reinforced risk management regarding group lending by the banks. Group lending restriction measure can have a positive impact on the housing market by securing the stability of financial market in mid- and long-term due to the restructuring of household loan and the action of right functions such as increased lending capacity. Since the excessive concern which is focused only on the total amount of the increase in household debt may cause psychological atrophy leading to greater impact on the real estate market, continuous efforts of the government and sufficient promotion for household debt restructuring seem necessary. 143

150 Market Trends and Outlook of Logistics Real Estate Joo Seungmin, Shin Ranhee Logistics real estate market is the field where institutional investors and REITs etc. began to have great interest in recent years, has high growth potential and attracted attention as the type of market where it is highly likely that the existing commercial real estate investment capital that is centered on Office may move by expanding. Logistics Real Estate Status According to the result of the survey carried out regarding the views on investment promising asset of commercial real estate in December, `15, the response that the logistics facilities was the investment promising assets showed the highest ratio with 29.6%, which was 0.9% p higher than that of the prime office (28.7%) that is the most important of commercial property investment. Yearly trade volume of South Korea in `15 released by the Ministry of Trade, Industry and Energy was 6th in the world with US $ 9,640 (US $537.2 billion for Exports, US $ billion for Imports). Recently, the lowest trade volume in the past five years was recorded due to the shrinking world trade, falling oil prices, China`s economic slowdown and decreasing intermediate goods import, however, it was the effect due to external factors and it is expected that the scale of trade volume will rise due to active making FTA. 144 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

151 P A R T 4 Issue Analysis Figure 4-19 Outlook on investment promising assets Logistics Agency business Retail SME business Hotels Industry center Officetel Source: Korea Appraisal Board (KAB) Real Estate Research Institute of Expert Survey (2015) As a result of the expansion of the same day delivery and next day delivery service by social commerce companies, the cases to lease or buy warehouses are on the rise in the Capital area, and it is also expected that the demand for advanced logistics facilities will last in the future in accordance with the expansion of relevant shipping service. Recently, the foreign investors have been raising the portion of profitable real estate investment due to rising rent, reduction of the vacancy rate in main investment areas, etc., and are expanding the investment targets from office to logistics, retail etc. In particular, in the case of REITs, they are actively increasing the investment in the logistics center, and not only buy the real assets which were completed but also are scrambling for their development. In the logistics real estate market, it is hard to determine rents and vacancy rates, and the price differences among similar things in the same area are being generated, however, investment is forecasted to proceed in the direction to generate the returns through the portfolio by region if the market transparency is getting better as the investors are recently entering the logistics real estate market. 145

152 Distribution of Warehouse and Hotspot Maps The total domestic warehouses reported to the Ministry of Land, Infrastructure and Transport (reporting obligation for over 1,000m²) are over 4,170 in total, and are mainly concentrated in Incheon, Busan, the Capital area 41.6% of domestic warehouses are concentrated in Seoul Metropolitan area (Gyeonggi-do 26.9%, Incheon 11.3%, and Seoul 3.4%). Such concentration of logistics real estate was being analyzed to be the impacts according to accessibility to labor market in the rear and ease of supply and demand. The warehouse facilities in Incheon and Busan are mainly for container facilities fulfilling import and export volume, bonded warehouses, oil storage etc., and the room temperature storages related to domestic cargo volume are intensively distributed in the Capital area. Figure 4-20 Logistics warehouse rate per 17 metropolitan citys and provinces Sejong metropolitan autonomous City Daejeon metropolitan City Daegu metropolitan city Gwangju metropolitan city Ulsan metropolitan city Jeju special self-governing Province Chungcheongbuk-do Gangwon Seoul metropolitan city Jeollanam-co Jeollabuk-do Gyeongsangbuk-do Chungcheongnam-do Incheon metropolitan city Busan metropolitan city Gyeongsangnam-do Gyeonggi-do Source: National Logistics Integrated Information Center 146 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)

153 P A R T 4 Issue Analysis Figure 4-21 Warehouse distribution map Figure 4-22 Warehouse hotspots map Source: Korea Appraisal Board, National Logistics Integrated Information Center Source: Korea Appraisal Board, National Logistics Integrated Information Center Market Trends of Logistics Real Estate Recently, the conversion of domestic logistics real estate market from 1PL (first party logistics) or 2PL (subsidiary) level to 3PL (consignment, outsourcing) is being accelerated. Domestic logistics real estate show differences in rent in accordance with the differences in scale, location, ease of labor supply and demand, and aging in and around Capital area. Recently, sharp differences in rent between relatively underdeveloped aging small- and medium-sized logistics facilities are being generated as the logistics facilities became large in scale following large logistics facilities built around the Capital area, and advancement is in progress in order to achieve the optimal hub function from producers to final consumption places. Logistics warehouses in Capital area are being distributed around Seoul, the final consumption place. 147

154 The level of rent and land price are being analyzed by the regions divided based on 30 minutes as the duration time to the north and to the south based on Central Point in Seoul (Duration: 30, 60, 90, 120 minutes) - The regions were derived using GIS spatial analysis based on the road network within the reachable spatial extent at the time of passing at the legally maximum speed within the pertinent time. * N (North) and S (South) mean north and south based on the central point of Seoul, the number means the time (in minutes) it takes to go from the central point in Seoul to the pertinent region. (Ex: S30 = area where it takes less than 30 minutes to the south from the center of Seoul) Figure 4-23 Capital area logistics real estate market region Source: Korea Appraisal Board (KAB) Real Estate Research Institute Trends in Logistics Real Estate Rental Price The range of rent levels by region tends to show that the farther from the center of Seoul, the lower it gets relatively due to the distance decline effect, and the rent level within the same time region in the north and south shows that the northern side has the higher level. Looking at the rent level by region, Seoul region shows relatively high level of land price on average with KRW 4.53 million/m², and also the highest rent level as the final consumption place (rent level range: KRW 38,000~ 69,000 /3.3m²) S60 region has an excellent access to the Capital region, shows active development of large logistics center due to relatively low land price level, some warehouses located in major traffic points are being sold before the completion as the companies and institutional investors to invest are on the rise. 148 Korea Appraisal Board Korea Real Estate Market Report(First Half Trends and Second Half Outlook for 2016)