Advance payments in the Pyongyang housing market

By Benjamin Katzeff Silberstein

Daily NK reports an interesting trend on the Pyongyang real estate market (or is it a countrywide phenomenon?) of construction companies selling apartment units before construction is finished, requiring what to me sounds like a regular deposit. First construction companies require the equivalent of $10,000 for the initial phase, and later, for interior work, at least another installment of the same amount.

I’m not sure this is an entirely new system or phenomena in the North Korean housing market, which, like virtually all spheres of the economy, has been increasingly guided by market mechanisms since the late 1990s. Nevertheless, the trend is interesting for several reasons. For example, advance payments suggest a trust in the system itself, despite a lack of transparency and formal rules. It’s unclear what would happen to customers who have made advance payments on apartments if construction doesn’t come through, but since the real estate market is still formally illegal, there is likely no judicial mechanism for people to demand their money back. It’s also unclear how widespread these practices are – obviously, most North Koreans can’t put up $10,000 for a new apartment.

Full article at Daily NK:

Real estate companies in Pyongyang are pushing ahead with construction projects in the new year after receiving permission from the North Korean authorities. These companies are reportedly securing construction funds by demanding upfront payments for spaces in the buildings.

“Owners have already been determined for half of the units in the apartment building in the Sadong area of Pyongyang, set to finish construction in the spring,” a source in the capital told Daily NK on February 1. “Typically, construction project managers announce the planned location and expected completion date, and then people who want to buy a unit are required to pay in advance in (US) dollars.”

According to the source, the advance payment system was created by individual construction project managers who lacked the private funds to begin building. They are demanding at least $10,000 USD for each advance payment, and are using these funds to begin construction.

Project managers must first gain permission to build in certain locations, and they cannot expect to raise the necessary capital through advance payments unless the location is central. This has led to intense competition between project managers to curry favor with the influential figures in charge of granting local building permits.

“Construction companies cannot earn the funds to start building unless they get a good location for the project,” the source said. “Although the new 12-floor apartment building is being built in the outskirts (of Pyongyang), they were able to secure advance payments because of the location’s convenient transport options to the city center.”

“Generally, prices for spaces in the planned buildings are set depending on the floor number and usage, such as for underground vs. upper-floor units, or for spaces intended to be used for a business,” she added. “Developers thus have to plan according to expected customer demands.”

A 1st-floor apartment may require a $10,000 advance payment, $30,000 for a mid-level unit, and $8,000 for an 11th-floor unit. Mid-level apartments are the most popular and therefore most expensive in North Korea, as they are considered a good balance between safety from burglary and ease of access by stairs during the country’s frequent power outages.

Once the building’s framework is complete, customers, who must be issued usage permits for new apartment units by the Pyongyang People’s Committee. must then pay about twice the initial payment for the interior construction of their unit to proceed.

The construction companies must also save a portion of the funds to give to the government. “For this building (in Sadong), units on the 12th-floor were deliberately withheld from sale. They are saving the entire space to give to the government upon completing construction,” said a separate source in Pyongyang, adding that this can be seen in the context of the fact that the real estate market remains illegal under North Korean law.

According to the Article 6 Section 44 of the Real Estate Administration Law (adopted by the Supreme People’s Assembly on November 11, 2009), “All revenue gained from unapproved real estate ventures are to be forfeited to the state.”

“Private businesses must give about 10% of the revenue from a construction project to the government, and they also have to give them the entire top floor,” the second source said, “but the top floor is generally not very popular anyway, the companies do not see this as a huge loss.

Article source:

Real estate companies in Pyongyang use advance payments to fund construction
Seol Song Ah
Daily NK
2018-02-06

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