Foreign capital shifts to “exit mode” as Korea’s tightening rules hit the rental market

Earlier investments are being withdrawn, and new acquisitions put on hold
Past episodes show how rising monthly-rent demand can fuel overheating
A wave of tax burdens has delivered the final blow, collapsing the profit model

Foreign capital in Korea’s rental housing market is moving rapidly into “exit mode,” despite a surge in monthly-rent demand that once drew global investors into corporate rental projects. Only a few months ago, foreign institutions were competing for key rental assets in the Seoul metropolitan area, but that momentum has reversed sharply as the government’s dense “regulatory package” took effect. Institutions that had been preparing for new entries have either suspended or withdrawn their plans, and several asset managers are even weighing full market exits.

Reversal of the “acquisition race”

According to the real estate industry on the 26th, signs of foreign investor withdrawal from Korea’s rental housing sector are now widespread. Canada Pension Plan Investment Board (CPPIB) formed a USD 340 million joint venture with domestic co-living operator MGRV earlier this year, but only months later reversed course and entered full-scale reconsideration of the investment. Morgan Stanley, M&G, and Singapore’s GIC have likewise begun re-evaluating their strategies, and some are reportedly exploring the possibility of withdrawing from the Korean market.

This shift is also affecting assets and projects that major institutions have already secured in key Seoul districts. KKR had pursued rental housing developments in Yeongdeungpo and Dongdaemun, while ICG targeted Gangnam and Jung District. Morgan Stanley pushed high-end small-unit rental developments in Geumcheon and Seongbuk. But with market conditions now shifting, uncertainty looms large over whether these projects can proceed as planned.

Until the first half of the year, Korea’s rental housing market was a prime target for global institutions. The rise in rental fraud cases, a growing single-person household base, and interest-rate volatility had all pushed investors away from individual landlords toward institutional rental models. High-end rental options near subway stations—featuring workspaces, gyms, and shared facilities—saw explosive demand, reinforcing foreign investors’ confidence in a long-term, stable rental-income model. This even drove up prices for office­tels and older office buildings considered easy to repurpose.

The picture changed abruptly after the government announced successive real estate stabilization measures. Expanded regulatory zones, acquisition-tax surcharges on corporate rental purchases, and the removal of corporate rental properties from property-tax exemptions delivered direct shocks to foreign institutions’ business models. Industry voices have since criticized the government for “rolling out real estate measures without pre-coordinating corporate rental taxation,” arguing that even if some rules are eased later, foreign capital is unlikely to return to a market now seen as high-risk.

Property collateral + monthly cashflow once offered “compelling value”

Foreign institutions’ initial confidence stemmed from the rapid rise in monthly-rent transactions and the expected yields this implied. According to the Ministry of Land, monthly-rent contracts accounted for 43.0% of all leases in 2021, rising to 51.8% in 2022, 55.1% in 2023, and 57.4% in 2024. Last year, monthly rents for apartments in the Seoul metro area rose 6.27%, with Seoul at 7.25% and Incheon at 7.8%—the steepest increases in a decade. For investors, this represented a market capable of producing predictable monthly cashflow.

Combined with the collateral value of real estate, rental housing appeared more attractive than bonds or deposits. The average rental yield on metropolitan office­tels reached 4.87% in last year’s third quarter, one of the highest levels in five years. Including medium- to long-term capital gains on collateral value, yields were estimated near 9%. With commercial offices past their investment peak, rental housing was seen as an appealing reallocation target.

Market indicators also strengthened expectations of long-term demand. As lending regulations tightened and gap-investing was curbed, more single-person and younger households shifted toward monthly rent. A KB Financial Group survey found that 45.1% of single-person households already lived in monthly rentals. Statistical projections show the share of single-person households reaching 70% by 2030. Meanwhile, the exchange rate’s surge from the mid-1300s to the mid-1400s per dollar over the past year created additional opportunities for foreign investors to earn both rental income and currency gains.

Core assumptions behind long-term-hold strategies begin to collapse

These optimistic expectations are now at risk of unraveling under heavy regulation. Under the “10·15 real estate measures,” Seoul and 12 cities in Gyeonggi Province were newly added to regulated zones. Corporate-owned rental apartments and long-term private rentals in these zones were removed from property-tax exemptions, triggering substantial tax burdens for corporate landlords. Acquisition tax in the regulated zones is set to rise to 12% for corporate buyers, prompting complaints that both market entry and exit routes are effectively blocked.

Earlier “9·7 measures” had already shocked the market by reducing loan-to-value (LTV) ratios for rental operators in regulated areas from 30–60% to virtually zero. While the government framed the rule as an anti-speculation measure, institutions aiming to acquire and operate rental housing long-term faced the reality that billion-dollar-scale projects cannot be executed on equity alone. Measures intended to stabilize housing supply instead ended up driving away capital willing to expand long-term rental stock.

Tax risks have been compounded by administrative errors. Last month, 60 private rental REITs in Korea lost their property-tax exemptions due to incorrect business-code filings, triggering the risk of massive back taxes. Many of these REITs are backed by long-term rental units, meaning they may be forced into asset sales or auctions if unable to absorb the additional tax burden. This raises the likelihood of delayed deposit returns, forced tenant relocations, and extended vacancies.

In response, the Seoul Metropolitan Government announced measures such as easing small office­tel construction rules and offering financial support to rental REITs. Yet even the mayor acknowledged that “foreign capital is avoiding Korea and looking elsewhere,” underscoring the difficulty of restoring confidence. With taxes and regulatory risks shaking the foundation of Korea’s rental-housing profit model, short-term policy adjustments are unlikely to reverse the deeply damaged investor sentiment.