Foreign tourists, investors flock to guest houses in Korea

The number of foreign tourists in Korea has topped 10 million, and guest houses are becoming very popular among them. Due to lack of lodging facilities, foreigners are increasingly attracted to guest houses. Investors are diverting their interest to guest houses from officetels and urban-style houses, with oversupply and lower returns. Franchise guest houses are also appearing.

Guest house is a dormitory-like lodging facility for foreign tourists. Thanks to low cost of around 50,000 won (44.5 U.S. dollars) per night, cheaper than hotels, it is attracting many foreign flashpackers.

Guest houses boasts of high profits. Guest houses in Jongno, the Hongik University area and Shinchon are more than 80 percent booked, with more than annual average of 10 percent in returns. "Assuming rooms are booked 50 percent, guest houses enjoy double the returns of officetels and urban-style houses that are saturated," said Goh Jong-ok, head of real estate agency Cocoon House. "Another advantage is that guest houses can attract daily clients, different from officetels that demand monthly lease.

Still another merit is that existing homes can be used for a guest house business. To resolve lack of lodging facilities, the government began "private foreign tourist lodging designation" in January last year. People residing at independent houses, apartments, row houses and multi-household houses of less than 230 square meter floor area can apply as foreign tourist lodging. The number of guest houses rapidly increased in Seoul to total 235 (711 rooms) as of May 24.

Guest house franchises are also emerging. The "24 Guest House" of Space Innovation is a guest house chain registered at the Fair Trade Commission. Instead of receiving franchise fees, the franchise headquarters directly engage in reservation management and advertisement. Employees fluent in foreign language are dispatched if a franchise store needs one. Kim Bo-ra at Space Innovation said, "Eight contracts were signed in just two months since we opened franchise application process. We are getting a heated response with more than five questions an average a day."

Side effect concerns are also heightening. Unlicensed franchises unregistered at the Fair Trade Commission are emerging, while others are demanding large amount of money for consulting fees to new investors saying they have ample guest house operation experience.

Experts advise close calculation of starting costs. Excess housing purchase and leasing costs or interior costs can lead to a decline in returns compared to investment. "Do not spend excessive money in interior design," said Oh Seung-ju, a start-up expert and head of consulting firm Seven Wisdom. "If someone is considering starting a guest house through a franchise, he or she should closely examine whether franchise headquarters are demanding too mush cost, and whether profitability model co-prospers with franchise."

"Those who are not confident in advertising and management, or unfamiliar with foreign culture, should not invest," Goh said.

Guest houses will also compete with business hotels. "New and decent business hotels will be massively built in central Seoul within three years. Though investment returns are high now, whether they will remain high in the longer term is questionable," said Park Hap-soo, head of real estate team at Kookmin Bank.