▲ YouTube videos claiming that the government will manage Jeonse deposits starting in October
"Is it true that a system where the government manages my Jeonse deposit starts in October?" and "If this happens, landlords will avoid Jeonse, and Jeonse will eventually disappear."
Recently, rumors have been spreading online that landlords will no longer be able to receive Jeonse (lump-sum housing deposit) key money starting in October, heightening anxiety among both landlords and tenants in the housing rental market.
Landlords are concerned because they cannot directly manage Jeonse deposits, while tenants worry that if landlords shun Jeonse, monthly rent arrangements might become more prevalent.
These concerns were sparked by the government's recent announcement of the "Jeonse-Monthly Rent Safe Trust" project plan.
On the 13th of this month, the Ministry of Land, Infrastructure and Transport (MOLIT) announced the project plan as a follow-up measure to its swift housing supply plan.
This project aims to convert monthly rent properties currently on the market into Jeonse properties to supply them to the market.
It was introduced to resolve the "demand mismatch" between landlords and tenants. Recently, low interest rates have led landlords in the rental market to prefer monthly rent over Jeonse, resulting in a decrease in Jeonse listings and an increase in monthly rent listings, which in turn has escalated housing cost burdens.
Specifically, a third-party institution holds and manages the tenant's Jeonse deposit, while the returns generated from operating the Jeonse deposit are paid to the landlord in the form of monthly rent.
To achieve this, the Korea Housing & Urban Guarantee Corporation (HUG), a public institution under MOLIT, has been designated as the "Jeonse and Monthly Rent Stabilization Organization" (hereinafter referred to as the Stabilization Organization). It will handle tasks such as recruiting landlords and tenants, depositing Jeonse money, managing investments, and returning funds.
The landlord, tenant, and Stabilization Organization enter into a three-way contract. Once the tenant deposits the Jeonse money into the Stabilization Organization, the organization operates these funds and pays the resulting profits to the landlord every month.
Simply put, it is a structure where tenants live in homes put up as monthly rentals by paying a Jeonse deposit, and landlords receive monthly rent.
At first glance, it may seem like the government is managing the Jeonse deposit instead of the landlord. However, from the perspective of the landlord, since the property was originally put up for monthly rent rather than Jeonse, there is no Jeonse deposit to hand over to the government in the first place.
In other words, rather than the tenant paying the Jeonse deposit to the landlord and the landlord entrusting it to a government agency—as in a conventional Jeonse contract—the tenant deposits the money directly into the Stabilization Organization, and the government pays the profits generated from these funds to the landlord.
In effect, the landlord receives monthly rent from the government rather than from the tenant.
Furthermore, since this project is strictly for voluntary participants, landlords who do not wish to participate can still list their homes using the traditional method of receiving a Jeonse deposit or monthly rent directly from the tenant.
Announcing the specific details of the project, MOLIT emphasized, "We plan to proceed with the project by receiving voluntary applications from landlords and tenants," adding, "Concerns about mandatory Jeonse deposit deposits are completely untrue."
HUG also posted a notice on its website stating, "This is not a project with legal participation obligations."
Nevertheless, the rumor that the state would manage Jeonse deposits appears to have stemmed from misunderstandings caused by the inclusion of the phrase "pursuing a project to trust Jeonse deposits to the state" in the "Economic Growth Strategy for the Second Half of the Year" released in July of this year, prior to the announcement of specific measures, according to MOLIT.
A MOLIT official stated, "Landlords do not entrust Jeonse deposits [to the Stabilization Organization]; tenants do. The landlords are people who originally wanted to receive monthly rent anyway, but it seems some influencers misunderstood this structure and spread incorrect information."
Another question surrounding the Jeonse-Monthly Rent Safe Trust project is whether it contains sufficient elements to entice landlords to participate.
While the project offers clear advantages for tenants—allowing them to secure Jeonse instead of monthly rent and eliminating anxiety over failing to get their deposit back since a trusted institution manages it—it appears less attractive for landlords in terms of generating strong voluntary participation.
In response, MOLIT stated, "In a survey targeting landlords, more than 20% expressed interest in participating in the Jeonse-Monthly Rent Safe Trust project."
For now, MOLIT plans to pay landlords interest income of around 4.5% per annum.
When announcing the project plan on the 20th, MOLIT proposed creating a housing supply revitalization fund using Jeonse deposits deposited with HUG. This fund would be operated through HUG-guaranteed real estate project financing (PF) loans, generating annual interest income in the 4% range to be paid monthly to landlords.
A MOLIT official said, "We announced at the time that monthly rental income would be in the 4% range, but since the current interest rate for real estate PF loans is around 4.5% per annum, that level is likely to be paid out."
To put it simply, a landlord in Seoul putting up an apartment with a Jeonse value of around 400 million won as a monthly rental and participating in this project could receive 1.5 million won per month in rent from HUG.
Additionally, landlords can expect to eliminate the risk of delayed monthly rent payments and reduce vacancy rates, given the high demand for Jeonse, according to MOLIT.
However, depending on the Jeonse-to-monthly rent conversion rate (the rate applied when converting a Jeonse deposit into monthly rent), participating in the project could be either advantageous or disadvantageous for landlords.
As of the second quarter of this year, the average Jeonse-to-monthly rent conversion rate for apartments in Seoul is 4.4%.
HUG stated that it will operate the Jeonse deposits received from tenants in a structure that minimizes principal loss. Even if investment losses occur, HUG plans to guarantee the full amount of the Jeonse deposit and normally disburse the monthly profits promised to landlords.
For registered rental business operators who are normally required to subscribe to deposit return guarantees, participating in the safe trust project exempts them from this mandatory requirement, thereby reducing the burden of guarantee fees.
MOLIT announced that it is currently consulting with the Ministry of Economy and Finance regarding tax support for landlords' income.
In addition, MOLIT plans to introduce incentives for landlords, such as allowing those who participate in the project and relocate from regulated areas like Seoul to provincial regions to receive an additional housing pension of about 1% to 3% per annum.
MOLIT expects that this project will help stabilize housing prices by increasing the supply of Jeonse properties.
This is because while it operates as Jeonse from the tenant's perspective, it functions as monthly rent from the landlord's perspective.
MOLIT officials stated, "Concerns over the disappearance of Jeonse stem entirely from misunderstandings about the project," adding, "From the tenant's point of view, it actually has the effect of increasing the availability of Jeonse properties."
Furthermore, because public institutions manage the Jeonse deposits, it prevents landlords from using Jeonse funds for so-called "gap investing" (buying homes with tenants' deposits), which is expected to yield stabilizing effects on housing prices.
However, the project is not expected to attract landlords who wish to invest their Jeonse deposits in high-yield, high-risk assets.
A MOLIT official noted, "This is a much more advantageous system for landlords who originally intended to put their homes up for monthly rent. It is also beneficial for landlords who find managing Jeonse deposits directly burdensome, as an annual interest rate of around 4.5% is guaranteed. These are the people targeted for applications."
The Jeonse-Monthly Rent Safe Trust project will first be implemented for housing valued at 2 billion won or less.
There are no restrictions on housing types, including apartments, villas, officetels, and detached houses.
While there will initially be no limit on the volume of eligible applications, verification procedures will be conducted regarding factors such as whether a building is illegal or if the Jeonse deposit is excessively high relative to market value.
MOLIT plans to disclose specific procedures, agreement details, and monthly rental yields for landlords late next month, before accepting project applications starting in October.
(Photo: Yonhap News)
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