How are lease shifts influencing Korea's rental housing?

Jeonse is a unique Korean housing rental system. It requires tenants to pay a substantial lump-sum deposit, typically 50% to 80% of the property's market value, instead of monthly rent. This deposit is returned at the end of the lease term. Residents have traditionally used low-interest-rate Jeonse loans from banks to lease housing. This practice led to a surge in 'gap investment', where investors buy houses with Jeonse leases requiring less equity capital.

Until recently, Jeonse was considered mutually beneficial. However, structural societal issues have emerged as housing prices stagnate, with some properties now worth less than their Jeonse deposits. This led to an increasing number of landlords unable to return the deposits. Consequently, since 2022, more people have opted for monthly rents over Jeonse, creating opportunities in the private rental housing market.

Figure 1: Jeonse and Monthly rents

Source: Korea Housing & Urban Guarantee Corporation (HUG), Supreme Court of Korea

Korea’s latest Rent Income Ratio (RIR) and Price Income Ratio (PIR) stood at 15.8% and 26%, respectively, in 2023 (KOSIS). The significant gap between RIR and PIR indicates declining interest in home ownership and a growing preference for renting. This trend suggests that policymakers may more actively address housing affordability, potentially through measures promoting a corporate-led private rental housing market.

Figure 2: Rent Income Ratio (RIR) and Price Income Ratio (PIR)

Source: KOSIS, Numbeo

The growing number of single-person and two-person households has also driven up demand for rental housing. Single-person households now dominate the Korean population, accounting for 36% in 2024 (KOSIS), and have become a key driving force for co-living operators. Despite this rising underlying demand, individuals own and transact most private rental housing in Korea, with a lack of professional, experienced operators. As a result, many operators are now seeking to enter the untapped co-living housing market.

These operators typically offer studio-type units ranging from 16 sqm to 60 sqm, with shared kitchen and laundry facilities. The primary occupiers are younger demographics, including university students. Additionally, foreign residents, whose numbers are also increasing, are key tenants. As they are usually ineligible for Jeonse loans, they rely more on monthly rent systems, making co-living an attractive option.

Furthermore, co-living operators generally offer flexible lease terms, from a few weeks to several years. Some even provide hybrid models allowing extremely short stays of a few days. These furnished accommodations have gained popularity among foreign expats due to their adaptability and convenience.

The shift towards monthly rental housing is also evident in “officetels” a common residential asset type in Korea. Officetels have seen a continuous increase in monthly rents over the last five years, contradicting the trend of plummeting sales prices.

Figure 3: Officetel’s monthly rent index and sales price index

Source: Korea Real Estate Board; 2023.12=100

The transformation of Korea’s leasing structure, driven by changing demographics and economic conditions, reflects a broader trend towards more flexible and diverse housing options. Investors are actively seeking partnerships with reliable operators or have already established joint ventures to become early entrants in the rental housing market.