Evolution and Characteristics of Korea's Real Estate Development Industry

Abstract

The outset of this study started with a question of why there is an absence of a large, professional real estate developer in Korea, however a domination of construction companies in development activities. The study traces the formative years of Koreas modern real estate development industry and explores how different factors within their historical socio-economic background have contributed to characterizing todays development industry. It focuses on the interplays of government intervention, space and asset market and the respective responses in the industry. The study aims to provide some explanations for the current underdeveloped, inactive presence of Koreas development industry. The fundamental emergence of extensive real estate development began with the countrys ambition to achieve rapid economic growth and to cope with the subsequent urbanization, under the reign of President Park Chung-Hees authoritarian regime during the 1960s and 1970s. In the course of pursuing such economic growth and coping with rapid increase in rural-urban migrants, the governments command-driven economy posed a unique setting in the formation of her development industry which laid a foundation on its current characteristics. The main findings of the study are as follows. One, the excess demand and governments heavy intervention in the space market resulted in reduced role of developer. As fast rate of urbanization continued apace, the housing shortage became acute with surging demand that outpaced supply. In response, the government assumed an exclusive role of land development to expedite the development process which restricted the developers of such activities from the outset. Meanwhile, the Korean government imposed a price control on new housing supply. Under such control, the entrepreneurial freedom of identifying a target market, employing differentiated design and so forth which are considered to be the domain of real estate developer was limited. In such environment, the profit maximization strategy of a developer was to maximize quantity and at the same time to minimize cost of production. In effect, the attractiveness of combining development and construction was greater in which construction companies were well suited, undertaking massive physical constructions of housings of match-box design. Two, the large capital requirements by massive apartment-type housing and limited access to capital in the asset market necessitated financial strength of the developer to initiate and drive development. The governments incentivized policies as well as the booming market spawned active participations of the market players in the developments of apartment-type housings that involved intensive capital investment. However, the governments strong regulatory oversight on the financial system, deliberately restricting capital inflow into real estate, resulted in the unavailability of capital in the asset market. As a consequence, such condition required commitment of considerable amount of equity capital from the developer him or herself. The resulting consequence of the reduced role of developer and the need of ones own capital to initiate and drive development project was the non-emergence of a true, professional real estate developer. With presence of low market risk and low approval risk, the big construction companies were more than eager to jump into development business. With their financial strength and capability in massive physical construction, they have come to exert dominancy in Koreas real estate development industry. Korean governments decisive role in large-scale land developments as well as massive and timely physical constructions by financially strong, big construction companies thus enabled such extensive real estate developments in a short-time frame. Going forward, as Korea transforms from developing country to developed country and experiences stabilization of economic growth and flattening of population growth, the characteristics of her development industry will not be the same as in the past. With greater emphasis on value-maximization of development and financial capability to successfully undertake such development, it is anticipated that the credit-constrained and non-professional developers are competed out of the market and developers with expertise and financial strength dominate.