Invest1 publisher3 min readPublished
HUG offers landlords 4.35% a year to hand their tenants' deposits to a public trust
Commitments to the safe trust have passed 1 trillion won ahead of this month's launch, against an annual target of 15 trillion. The single-digit rental income tax that would improve the landlord's side is still a proposal.
The Investor · Invest desk
What happened
- HUG said on the 21st that it launches a jeonse and monthly rent stabilization body on the 22nd, with a public notice late this month recruiting landlords and tenants for the safe trust program.
- The agency has set an annual target of 15 trillion won of jeonse deposits held in trust, which it estimates would have the effect of supplying about 93,000 homes.
- Eligibility starts at homes worth up to 2 billion won with no limits on type, income or assets, mortgaged homes included, but the whole deposit has to go into the trust and participation is voluntary.
- Jeonse price verification and agreements run from November with balance payments escrowed, move-ins start in January, and a housing supply revitalization fund is to be registered in February.
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Why it matters
- decision A landlord now has to price what the tenant's deposit was earning in their hands: below 4.35% a year the trust pays more, above it joining is a pay cut.
- constraint Joining converts an operator's cheapest funding into an income stream, so any building or buying it wants to do afterwards has to be financed with borrowed money instead.
- exposure The guarantor's own book sits behind the fund, so losses that would otherwise fall on lenders or investors land on HUG.
- contradiction HUG describes the payout as similar to existing monthly rent while its own example comes in below it before tax, leaving an unlegislated tax rate to decide whether a landlord is better off.
Under jeonse the tenant hands over a lump sum instead of paying monthly rent [9], and HUG says operators have been putting those deposits into construction costs or home purchases [16]. In the trust the money stops being spendable [16]. What the landlord gets instead, in HUG's own worked example, is 725,000 won a month before tax, the 4.35% return applied to a 200 million won deposit and divided over twelve months [13][10][1].
That is 15,000 won a month below the 740,000 won the villa was letting for, or 180,000 won a year, about 2% [10][2].
The tenant's half of the same example is the stronger one. Own funds of 40 million won plus a 160 million won loan at 3.97% is 6.35 million won of interest a year, about 529,000 a month [10][11][3]. Housing costs fall roughly 211,000 a month and the cash committed rises by 30 million [12][4]. The extra equity is earning about 8.4% a year in reduced outgoings, before the deposit guarantee fees HUG says the tenant also saves [4][12].
Against the annual target, the 1 trillion won already committed is 6.7% [2][6][5]. The 2 to 3 trillion won Choi In-ho described as potentially secured would be 13% to 20% [5][5]. And the first trillion includes units from the Korea Land & Housing Corporation's purchased rental housing and from asset management companies [5]. Dividing the target by HUG's own home-count estimate gives an average deposit near 161 million won, against an eligibility ceiling of 2 billion [6][6][15].
Taking the deposit away from the operator leaves a funding hole, and the items on HUG's list are debt. It is reviewing a rise in the mortgage guarantee cap from about 60% of appraised value to 70% or 75%, which adds 10 to 15 million won of borrowing per 100 million won of value [16][7]. Cho Han-jun, head of HUG's safe trust planning office, said the structure works so that if the fund starts out as HUG-guaranteed loans, HUG takes responsibility for any principal losses on those loans [17]. A second idea would turn up to four years of monthly rent into bonds sold to investors [18]. HUG's illustration of 10,000 households and 300 billion won of rent works out at 625,000 won per household per month, below the 725,000 in the villa case [18][8][13].
The single-digit rental income tax is the term that would change a private landlord's number, and the government is still pursuing it [3]. Sedaily's report did not include the current rate or the proposed one, so the after-tax comparison cannot be run. Before tax the landlord is trading 180,000 won a year for no risk of late payment, up to two months of income during a vacancy, and cheaper lease deposit guarantee fees for registered operators [2][13][14]. I would expect that to land with institutions and public bodies before it lands with the owner of a single villa, and the early commitments are that mix [5]. The other reading puts liquidity first: if the small non-apartment operator's problem is cash to keep building, the guarantee cap and the rent bonds matter more to them than the tax rate [16][18].
What the trust is being sold against is jeonse fraud, which HUG's own framing names as the reason confidence in the non-apartment market collapsed and the market moved to monthly rent [19]. For a landlord with no spare cash, HUG is also weighing support for funds to repay departing jeonse tenants [20].
What to watch
- Whether the single-digit rental income tax proposal gets an actual rate attached, and when.
- Whether the mortgage guarantee cap moves from about 60% of appraised value to 75%, and on what collateral test.
- The November verification round and January move-ins, which give the first count of private non-apartment landlords joining as against LH and asset management company units.