Jeonse giving way to monthly rent: report

Nearly half of all tenants in South Korea have signed up for a monthly rent contract, a report showed on Monday, underscoring the shift in tenancy agreements accelerated by a prolonged period of low interest rates and stagnant property prices.

According to Real Estate 114, the proportion of the monthly rent, or “wolse,” in the total rented homes rose from 45.85 percent in 2005 to 49.69 percent in 2010, largely due to the steady conversion from the once-dominant lump-sum deposit, or “jeonse,” to the monthly rent.

Jeonse is a unique form of house lease in Korea, under which tenants put up a lump-sum deposit, about half the price of the house in question, and get the money back without interest when the contract expires in usually two years. This particular house lease system had enjoyed high popularity since the 1970s, aided by the heady property boom, but has lost its allure in recent years.

The real estate information provider said there are still a number of jeonse tenants in Seoul and its surrounding areas, but the rise in the number of wolse tenants was noticeable. The proportion of the tenants on monthly rent in Seoul rose from 38.20 percent to 42.81 percent in the past five years, while the Gyeonggi Province saw the ratio rise from 38.95 percent to 42.42 percent. Incheon also witnessed a similar trend, with the ratio up to 45.68 percent last year from 41.97 percent five years earlier.

“The Gyeonggi Province and other key areas surrounding Seoul are expected to see a continued surge in the number of wolse tenants in the coming months,” said Real Estate 114, adding that the monthly rent would at least match or overtake the jeonse in the key metropolitan area in the near future.

The shift toward monthly rent rather than a lump sum deposit for leasing a house comes as the country has kept borrowing costs cheaper than ever for an extended period. The Bank of Korea last week froze the benchmark rate at 3.25 percent for the fourth straight month, citing greater global growth uncertainty.

The low interest rate means that landlords who put the jeonse deposit in a bank are unlikely to earn a sizable interest. As the property market remains in the doldrums, home owners see no investment gain from their properties, either. The only viable alternative is wolse, which ensures a steady stream of income far higher than the interest available at banks.

As the relative benefits to landlords of wolse have increased in recent months, a growing number of them are switching away from jeonse. The cost of jeonse is also surging as landlords seek to compensate for declining interest income and demand has been overtaken supply.

Outside of Seoul and the surrounding population-dense region, the number of wolse tenants is larger than that of their jeonse counterparts. Back in 2005, only two regions saw the ratios of wolse tenants top 60 percent. Last year, seven regions joined the club: Jeju (83.72 percent), North Jeolla Province (64.26 percent), North Gyeongsang Province (63.97 percent), South Gyeongsang Province (61.68 percent), Gangwon Province (61.59 percent), Gwangju (60.81 percent) and Ulsan (60.28 percent).

The dominance of wolse tenants in rural areas is attributed to the relatively cheaper level of monthly rent and high demand from tenants who sign up for a short-term contracts as they plan to stay in the region temporarily due to their work duties.

By Yang Sung-jin (insight@heraldcorp.com)