Dunchon-dong Redevelopment Project Subscription Augurs Trouble

Anemic demand for new luxury condos signals rough roads ahead for Seoul's real estate market.

Dunchon-dong Redevelopment Project Subscription Augurs Trouble

Photo: Model for the development in Olympic Park Foreon.  Credit: Olympic Park Foreon.

The redevelopment project in the Dunchon-dong 둔촌동 neighborhood in the eastern part of Seoul was once the city’s most hotly anticipated mega-project, with 85 new condominium buildings scheduled to supply more than 12k units to the real estate market. But with Seoul’s real estate market cooling down, the initial subscription for the new housing units, which closed on December 6, is showing signs of trouble. (See previous coverage, “Troubled Redevelopment in Dunchon-dong.)

On the opening subscription day for the Olympic Park Foreon 올림픽파크 포레온 condominium complex, the official name of the condos slated to be built in Dunchon-dong, a little more than 13,647 bidders subscribed for 3,695 units, resulting in a subscription ratio 청약율 of approximately 3.7 to 1. Although technically oversubscribed, this subscription ratio is an anemic one: in last year’s sizzling real estate market, the average subscription ratio for a new condo in Seoul was 163.1 to 1.

Despite the difficult economy, Olympic Park Foreon developers argued that they may ultimately see as many as 100k subscribers. In reality, Olympic Park Foreon’s subscription ratio even fell below the ratios of other condos offered in the same neighborhood just last month. The Sharp Park Soleil 더샵 파트 솔레이유 condos, also set to be constructed in Dunchon-dong, had a subscription ratio of 15.7 to 1 in November. Many bidders who win the subscription lottery elect not to purchase, which means Olympic Park Foreon may fail to sell out its units at the offering price - a disaster scenario.

Under-selling would be ruinous for former residents of the area, who would otherwise have gained a new house at an increased value in exchange for their old homes. If the new construction loses money, the former residents will instead be on the hook to pay a significant sum to cover the loss. For the developers, the disaster may not wait until the under-sell is finalized. The news of weak subscription ratio undermined the share price of the construction companies in the development consortium - Hyundai Engineering and Construction 현대건설, Daewoo Engineering and Construction 대우건설, and Hyundai Development Company 현대산업개발 - by between 1.64% to 3.46%.

Although the fourth company in the consortium, Lotte Engineering and Construction 롯데건설, is not publicly traded, it is facing persistent rumors of impending insolvency. The weakening real estate market will likely lead to a loss of confidence in asset-backed commercial papers, a typical loan instrument for large construction projects in South Korea, deepening the country’s ongoing credit crisis.

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