Land Prices for Builders Too High

Mr. Yang, a representative of a real estate developing company, started buying land to build apartments in Paju, Gyeonggi Province starting November 2005. He planned to buy 20,000 pyeong and build 800 apartment units, but gave up in just a year.

He gave up because of soaring land prices. At first, lands cost 800,000 won per pyeong, but now many landlords refuse to sell their land at even 2.5 million won per pyeong. With the price cap on apartment prices set to be introduced from September this year, the project is far from profitable.

“If the land price goes down, we can lower apartment prices. But the government is asking us to lower apartment prices when the land price is soaring,” he said.

Housing prices are stabilizing with the government’s announced real estate measures, but land prices in the metropolitan area are showing no signs of going down. Therefore, construction companies are demanding the government come up with an alternative plan because they cannot go on with land prices so high.

In fact, according to an internal business plan of three real estate developers that Dong-A Ilbo secured on Monday, land prices make up 70% of total working expenses in some cases.

According to a business plan of company A, the cost of an apartment complex project in Jamwon-dong, Seoul is 99 billion won, of which the land price is 52.4 billion won or 64% of the cost, and the interest from financing is 11 billion won. Meanwhile, construction costs take up merely 27%.

The company set the apartment price at 35 million won per pyeong and is planning to raise about 8.0 percent in profit. This is even higher than Seocho Art Xi of GS Construction that set a record for initial apartment price. It is literally impossible for the company to lower apartment prices with current land prices so expensive.

Company B is going through the same problem with its project to build apartments in Gwangjang-dong, Seoul. Land prices amount to 16 million won per pyeong, taking up more than 70% of the total cost. If the company were to raise 5% of profit, the initial apartment price would be higher than 20 million won per pyeong.

Company C planned to build apartments in Geumchon-dong, Paju, but gave up because of high land prices. Land prices were 2.2 million won per pyeong, cheaper than Seoul. However, the company gave up because even 2% of profit was not guaranteed, as it was difficult to get more than 6 million won for construction cost per pyeong. Construction costs take up 68% of the total cost. However, construction costs are high because the scale of the project is big, and they not too high to affect the total project.

Land prices in Seoul and Gyeonggi Province are high because of scarcity. Landlords in these regions have owned land for a long time, so they have no reason to sell their land at a cheap price even when the housing market is sluggish.

Starting this year, capital gains tax for non-commercial lands has been increased to 60 percent. Therefore, landlords are refusing to sell their lands altogether, or are transferring the tax burden to the buyers.

Also, with the presidential election next year, widespread expectations of political pledges are contributing to unrelenting land prices.

“Landlords are not needy for cash, so they have no reason to sell their land at a cheap price with the tax so high,” said President Jang Yong-seong of the developing company Solex Planning.

“Developers are not building apartments because the land prices show no sign of going down, and the price cap on apartments is to be introduced this year. This will inevitably lead to supply shortages,” said Haemil Consulting President Hwang Yong-cheon.

“We are designing many policy measures to lower land prices,” said Park Sun-ho, an official at the Ministry of Construction and Transportation.

koh@donga.com sukim@donga.com