Mapo Raemian Prugio: This Is Its Fair Price.

What would be a fair price for Marepu (Mapo Raemian Prugio) in 2023?

Since the 2010s, Mapo has emerged as a new residential hotspot, widely seen as the top-tier area still within reach for ordinary large-company office workers.

Naturally, it attracts a lot of attention as a residential area and effectively serves as a barometer for the Seoul real estate market.

The most recent actual transaction price is 1.62 billion won, about 16% below the late-2021 peak of 1.935 billion won.

Compared with large apartment complexes in Jamsil, which have fallen by nearly 30% over the same period, you could say it has held up relatively well.

Can we regard this 1.62 billion won price for Marepu as a fair value?

To calculate fair value, I estimated two key variables.

1) Jeonse price converted from monthly rent

First, the jeonse price converted from monthly rent is calculated simply based on the interest rate. For example, if an apartment generates 10 million won in annual cash flow and the jeonse loan interest rate is 1%, the fair jeonse price for that apartment would be 1 billion won.

That is because 1% of 1 billion won is 10 million won. Of course, the market does not operate this neatly in reality.

Actual jeonse prices are more heavily influenced by supply and demand, and because jeonse loans are not available above roughly 500 million won, interest rates are not directly linked.

However, since interest rates have become a crucial variable starting last year, it has become important to derive reasonable jeonse prices under various interest-rate scenarios.

Jeonse prices matter because they are the financial vehicle that underpins gap investing.

2) Fair jeonse-to-sale price ratio

Determining a fair jeonse-to-sale price ratio is a more complex problem than converting jeonse from monthly rent.

That is because what counts as a fair ratio depends on one’s own preferences and risk appetite.

For example, in 2017, jeonse ratios for major Seoul apartments once surged to as high as 70–80%, while in recent years they have traded around the 50% level.

If we assume a jeonse ratio of 50%, then the fair sale price of an apartment with a jeonse price of 1 billion won would be 2 billion won.

Given that transactions in recent years have occurred around the 50% mark, we will assume a fair jeonse ratio of 50%.

The material above is from an AWARE seminar held in November 2022. Based on an interest rate of 5.0%, the fair jeonse price for an 84-square-meter unit at Marepoo (the complex average) is 720 million won.

Given that recent actual jeonse transactions are around 750 million won and jeonse loan rates are roughly 4.75%, the calculation more or less lines up with reality.

From there, AWARE assumed that funding costs would rise by about 1.0 percentage point and that the jeonse-to-price ratio would recover slightly.

Under those assumptions, the fair sale price for Marepoo comes out to 1.333 billion won.

Only God knows where market interest rates will actually go, but if you take a conservative view of the market, it is reasonable to expect additional downside on the order of several hundred million won.