Gap Investment

The jeonse system as premise

Gap investment does not exist without the Korean jeonse system. Jeonse is a tenancy in which the tenant lodges a large lump sum as a deposit, lives without monthly rent, and receives the principal back at the end of the contract. For the owner the deposit functions as an interest-free loan, so a property can be acquired by contributing only the difference between the sale price and the deposit as one's own capital.

The smaller that gap, the higher the return on the capital committed. That is why the practice concentrated in regions and periods where the ratio of deposit to sale price was high. Unlike bank loans, deposits carried no interest burden and fell outside debt-service ratio regulation, so gap investment functioned as a high-leverage instrument that bypassed regulation.

Spread and reversal

The practice spread during the housing price rise from 2017 to 2021. When prices and deposits rise together, the increased deposit at renewal can cover the previous one, so the structure sustains itself and repeated acquisition of multiple properties remains possible. It has been argued that amendments to tenancy law and the tax benefits of the registered rental business scheme also bore on the incentive structure of these years.

The phase reversed with the interest-rate increases of 2022. As prices and deposits fell together, renewals produced reverse jeonse, in which the new deposit fell short of the old, and landlords with almost no capital of their own could not fund the difference. Where the sale price fell below the deposit, the so-called tin-can jeonse, tenants could not recover their principal at all.

Transfer of risk

The core problem of the structure is the distribution of risk. Gains in the upswing accrue to the landlord, while losses in the downswing transfer to the tenant who cannot recover the deposit. For many tenants that deposit is their entire assets and also the funds required to move elsewhere, which makes the character of the loss different from an investment loss.

Large-scale jeonse fraud cases followed from 2022: landlords who had acquired hundreds of units through gap investment and could not return deposits, acquisitions made under borrowed names followed by bankruptcy, and cases in which an inflated sale price was covered by the tenant's deposit. Responses included tightening the requirements for deposit-return guarantees and expanding disclosure of tenancy information, while the argument continues that the jeonse system itself passes credit risk onto tenants.