The end of the ‘reconstruction lottery’ era

This is a story from 20 years ago. During my university years, I lived alone for two years in a five-story apartment on the outskirts of Seoul. Built in the 1980s, it was an old building, but its lower rent made it a more affordable option than studio apartments near the university. Even back then, rumors were circulating that redevelopment was imminent.

A few years later, when I revisited the neighborhood to look for a newlywed home, redevelopment plans had become much more concrete. It was a low-density residential complex in a prime location near a subway station, and the relatively low initial investment cost—around 200 million won—attracted investors. The safety inspection and formation of the reconstruction association proceeded swiftly. Everyone was convinced that the area would be transformed into a brand-new apartment complex within a few years. Housing prices skyrocketed, reaching 800 million won by the summer of 2021.

However, the latest update on the project painted a very different picture. Not a single shovel had hit the ground yet. The reconstruction association had selected a construction firm two years ago but failed to agree on construction costs and other issues, ultimately terminating the contract. This led to a legal dispute. Housing prices dropped to the high 400 million won range, while the expected additional contributions from owners surged to 500 million won. This particular complex, which had been selected as the first ‘Seoul-style reconstruction’ project—a government initiative promising fast-track redevelopment—became a prime example of how rising costs hindered redevelopment.

Disputes over construction costs and additional financial contributions have become routine in reconstruction projects. Associations are revising their plans due to unexpectedly high contributions or engaging in legal battles with construction firms demanding cost increases.

In the past, highly profitable reconstruction projects sometimes required no additional contributions from residents at all—so-called ‘free reconstructions.’ In some cases, the sale proceeds exceeded total project costs, even resulting in reimbursements for residents. Even when contributions were required, the financial burden was minimal. Buyers could cover only the initial deposit and rely on loans for the interim payments. The final lump sum due upon occupancy could be financed through mortgage loans or tenant deposits. This is why reconstruction was considered a ‘lottery’ investment.

However, this once-successful formula is now faltering. Rising construction costs have led to higher financial contributions from residents. Interest burdens have also increased, and in many cases, the required financial contributions exceed loan eligibility limits, making the cash burden even heavier. At the same time, pre-sale prices have risen. Yet, the real estate market is facing an unprecedented downturn. The number of unsold apartments nationwide is 70,173, the highest since 2012. Reconstruction association members now face the additional risk of bearing losses from unsold units.

Since 2020, construction costs have risen by more than 30%. Many in the real estate industry predict that U.S. tariff policies and exchange rate fluctuations will drive costs even higher. A lawyer familiar with the redevelopment sector remarked, “Going forward, it will become standard practice to increase construction costs in line with inflation after the project has already begun.” This means the final financial contributions, determined upon project completion, will likely be much higher than initially expected.

In response to these changing conditions, both the government and local authorities are introducing policies aimed at improving project profitability. However, the public must also acknowledge this new reality. It is crucial to carefully evaluate whether premium architectural designs—intended to establish a complex as the most desirable in the area—are actually beneficial. Except for a few top-tier locations, the cost of luxury upgrades may outweigh the potential rise in property value. Clinging to outdated success formulas and treating reconstruction as a lottery must end.