Korea's safe rental trust moves jeonse risk from tenants onto HUG's guarantees

In HUG's worked example, the tenant borrows 160 million won at 3.97% and pays about 530,000 won a month in interest ^[8][2]. The landlord in the same example receives 725,000 won a month, or 4.35% a year on the full 200 million won deposit ^[9][1]. The trust therefore pays 0.38 percentage points more on the whole deposit than the tenant pays on the borrowed part ^[3]. HUG plans to earn that money by using deposits to fund housing supply and ease cash shortages at small and mid-sized builders ^[6]. If the example's 4.35% applied to the whole 15 trillion won annual target, payments to landlords would come to about 652.5 billion won a year ^[4][8]. Those builders are the borrowers, and HUG has said who pays if they cannot repay. Cho Han-jun, head of HUG's safe rental trust planning office, said that "if the fund starts out in the form of HUG-guaranteed loans, the structure is one in which HUG takes responsibility if principal losses occur on the loans" ^[13]. The trust is being offered to tenants as a way to ease worries about getting their money back ^[1]. Under the structure Cho described, the loss tenants feared becomes HUG's loss. HUG's plan keeps leverage in the villa market and moves much of it onto its own mortgage guarantees. Operators used to spend deposits on construction or on buying homes. Once the money is in trust they cannot spend it ^[12]. HUG is reviewing a rise in its mortgage guarantee ceiling from about 60% of appraised value to 70% to 75% so operators can borrow more ^[12]. It is also considering bonds backed by up to four years of monthly rent ^[14]. Its illustration, 300 billion won from 10,000 households over four years, works out to 625,000 won per household per month ^[14][9]. The 1 trillion won is a weaker test of private demand than it looks. Choi In-ho, HUG's president, said that "commitments to the safe rental trust business are estimated to have surpassed 1 trillion won, including purchased rental housing from the Korea Land & Housing Corporation (LH) and asset management companies, and we have potentially secured 2 trillion to 3 trillion won" ^[3]. HUG did not say how much of that comes from LH and asset managers and how much from individual landlords. Choi's upper estimate is a fifth of the target: 1 trillion won is about 6.7% of 15 trillion, and 2 trillion to 3 trillion is 13% to 20% ^[6]. HUG estimates the full target would have the effect of supplying about 93,000 homes, roughly 161 million won of deposits per home ^[4][7]. The first possible outcome is that private villa landlords answer the public notice due late this month and bring jeonse back to a non-apartment market that Sedaily describes as battered by jeonse fraud ^[5][15]. The second is that commitments stay with LH housing and asset managers, and the trust becomes a funding line for public rental supply. In either case, builder loans could earn less than the payout, and HUG's guarantee would cover the gap ^[13]. I think the second outcome is the likeliest in the first year. A private landlord in HUG's example gets 15,000 won a month less than the current rent, about 2%, and loses use of the deposit. In return the landlord gets no late-payment risk and up to two months of income during vacancies ^[4][9]. The single-digit tax rate on rental income that would make the offer better is still only a government proposal ^[10]. The case against my view is on the tenant's side. The tenant puts in 30 million won more and saves about 210,000 won a month, roughly 8.4% a year on the extra cash ^[8][5]. That may be enough for tenants to bring landlords in with them. Agreements start in November ^[7].