Korea
Land value capture in Korea
The government must recover land value gains from government-induced development in excess of normal increases. This principle supports the consistent and widespread use of land value capture tools in the country (Table 2.32). Developer obligations are a regular component of the planning system and therefore are always collected by local authorities. Charges for development rights are frequently levied when building at higher density, and compensation is defined on a case-by-case basis. Strategic land management and land readjustment are also common. There is no legal framework for infrastructure levy. Even though there has been some public discussion to introduce this tool, there are many practical obstacles, such as identifying the benefited property owners and determining the rate to be levied.
Enabling framework
Korea has two levels of government at the subnational level, with a complex and varied structure. At the regional level, there are 8 provinces, 1 special self-governing province, six metropolitan cities, Seoul Metropolitan City and Sejong special self-governing city, both of which enjoy special status (OECD/UCLG, 2019, p. 192[1]). At the local level, there are 226 entities of varying sizes of area and population, among cities, counties and autonomous districts. These local authorities are further subdivided into 3 500 sub-municipal localities.
The principle of social function of property enshrined in the Constitution stipulates that the exercise of property rights shall conform to public welfare. The Constitution also establishes that restrictions to private property may happen for public necessity, in which case compensation is due. According to the Restitution of Development Gains Act (1989), the State may collect charges on increases in land prices in excess of normal increases in land prices only when land development happens.
The national goverment creates the legal framework of land value capture. The National Land Planning and Utilisation Act provides the legal basis of the spatial planning system (OECD, 2017, p. 147[2]). Local authorities are responsible for strategic planning and zoning regulations. They implement most land value capture instruments, except for strategic land management (land banking).
Charges for development rights
The national government allows local authorities to charge a fee from developers and landowners that make a request to build at higher density than the baseline in the local zoning law or whose building request benefits from previously enacted planning changes. This instrument was introduced in the national legislation in 2009 concerning housing development projects in Seoul Metropolitan City, and in 2011 for the rest of the country, concerning any type of redevelopment. Since then, local authorities frequently adopt it and collect the revenues.
Local governments negotiate the charge with developers on a case-by-case basis, notably for large projects. Depending on project characteristics and according to the estimated land value gains caused by densification, the government will decide on compensation due, to be paid upon project completion. The compensation may be paid in cash or through the provision of infrastructure or affordable housing units.
When the payment is made in cash, the funds collected are earmarked for the specific purpose of improving the local infrastructure within the jurisdiction. Local infrastructure may comprise the provision of public space, public transportation, public utilities and other types of improvements.
The payment through the provision of affordable housing units is recent. Developers have to build a share of affordable units on-site. The units shall remain affordable for around 20 to 30 years and benefit households with an income below 70% of the area’s median income level. If the provision is not possible, developers may satisfy this requirement by paying a fee in cash. The funds collected from the fee are earmarked to finance affordable housing by the local government.
In all, local authorities have the administrative capacities to follow a structured procedure to define compensation. The main obstacle to implementation is the opposition manifested by landowners and developers, who frequently file claims against the charge.
Developer obligations
Developer obligations are established by national law and a prerequisite for every development project. In order to compensate the impacts that new development or development at higher density will have on local infrastructure and services, the developer must present a plan to the local authority to provide the necessary infrastructure with the request for building approval. Local authorities have high discretion in issuing development approvals, establishing the compensation and reinvesting the collected funds.
The developer may be exempt of providing infrastructure only if the project is small, since the impact on local infrastructure is considered negligeable. The size threshold varies with the type of development.
The charge may be calculated using an established rule or negotiated. If calculated, the method for defining the compensation takes into consideration the impacts on infrastructure and the type of development. In any case, the charge cannot be paid in cash, except in infrastructure-levy areas, where a payment for installation of infrastructure in cash is required.
Since developer obligations are incorporated into the planning system, local authorities always charge them. The instrument is effective, since almost 100% of infrastructure costs are borne by developers. There are no significant obstacles to implementation, and developers do not usually object to the obligations.
Land readjustment
Land readjustment takes place often, as a method to acquire public land in newly urbanized areas, secure land for public improvements and redevelop built-up areas. The enabling framework is set at the national level, but the permissions to carry out the projects are granted at the local level. Both public and private actors may conduct land readjustment, among private landowners, landowners’ cooperatives, local governments and public corporations, e.g., the Korea Land and Housing Corporation.
Since 2000, in land readjustment projects, the land is exchanged and subdivided without altering the underlying land rights. The land is developed and then redistributed to landowners, after deducting a share for public improvements and another one for future sales or leases. This reduction in ownership area is compensated by the land value gains generated from project development. In the end, landowners have smaller, but more valuable holdings.
The revenues from the land sales are used to pay for the project development. Notably, 100% of the cost of public improvements related to land readjustment projects is recovered through the sale or lease of those plots. The financial viability of the operations is an important characteristic of land readjustment.
In privately-led land readjustment projects, the consent of landowners representing 1/2 of the total number of owners and 2/3 of the total land area is required. Landowners may be organised in a cooperative, which must be registered as a legal entity.
Public actors may also conduct land readjustment. They are entitled to do so when the application filed by landowners or cooperatives is not successful or when these actors give consent to the public entity. When public facilities are needed, or in case of natural disaster and emergencies, no consent is needed, and the participation of landowners is compulsory. The participation of resisting landowners may be enforced through expropriations. Expropriations, however, are rarely carried out.
Recently, the number of land readjustment projects has increased, while the number of expropriations has been decreasing. Starting from the 1980s, whole land readjustment projects were conducted only trough expropriations, especially for the purpose of social housing development. Since the 2000s, expropriations are only used to overcome the resistance of landowners who do not deliver their land even after the necessary consent is reached.
After readjustment, landowners receive a plot with a value proportional to their original holdings, located on or as close as possible to their original land. They may receive a residential or commercial unit. Alternately, they can opt to exchange reallocated plots for cash. Landowners sometimes appeal against the decision to pool and readjust their plots, but resistance by landowners is not a significant obstacle.
The main obstacles to the adoption of land readjustment projects concern expropriations and the protection of affected residents. Expropriations are expensive to carry out, because of the high price of land in urban areas. Affected residents are displaced tenants and informal residents, who receive insufficient financial compensation. Land readjustment projects do not typically foresee resettlement alternatives for them.
Strategic land management
There are two categories of public land in Korea: nationally owned land, which is managed by the State Property Act, and land owned by local governments, which falls under the scope of the Public Property and Commodity Management Act. For historic reasons, the government holds significant amounts of land, notably in mountainous, rural areas, but not always land that could serve urban development purposes.
The independent public corporation Korea Land and Housing (LH) Corporation acquires and retain land. Since the 1960s, LH Corporation has played a key role in developing public land and supplying social housing. It acquires land both to reserve areas for housing projects and to hold land as an asset.
Purchases of large blocks of undeveloped land are conducted at market price or through expropriation. The government or an authorized developer, such as the LH Corporation, can freeze land prices before the announcement of a public investment or rezoning and buy land at that price.
Land acquired for strategic land management is either destined to public projects or transferred to other entities, via sales and leases. If destined to public projects of land development or housing construction, the lands are reserved only for a short time. Other than that, land is typically retained for 2 years before being sold. Typically, the acquired land is sold at a predetermined price to the preferred buyer.
If the land is leased to a private actor that is not conducting a project of public purpose, the rent is calculated as 5% of the land value. Lease length depends on the permitted land use. To illustrate, for affordable housing, the length is typically of 30 years. The rent is paid through recurrent lease payments.
In all, strategic land management yields substantial revenues to the government. Between 2010 and 2019, the yearly revenues raised through strategic land management amounted to 209.2 million USD. In addition, the yearly revenues raised through the ground rents of leased public land corresponded to 200 million USD. The revenues collected from land leasing are earmarked for the purpose of land banking.
Some implementation challenges remain. Public land leasing is weakened by the fact that the government does not hold a significant amount of land in urban areas. Coordination among the relevant public entities and an adequate legal framework are sometimes lacking.
References
[3] OECD (2022), “Subnational government structure and finance”, OECD Regional Statistics (database), https://doi.org/10.1787/05fb4b56-en (accessed on 13 January 2022).
[8] OECD (2021), “Subnational government structure and finance”, OECD Regional Statistics (database), https://doi.org/10.1787/05fb4b56-en (accessed on 25 November 2021).
[2] OECD (2017), Land-use Planning Systems in the OECD: Country Fact Sheets, OECD Regional Development Studies, OECD Publishing, Paris, https://doi.org/10.1787/9789264268579-en.
[1] OECD/UCLG (2019), 2019 Report of the World Observatory on Subnational Government Finance and Investment - Country Profiles, OECD/UCLG.