A Study on Shifting the Rate of Security Deposit Versus Monthly Rent of Small and Medium-sized Neighborhood Commercial Buildings

As the transformation to an aging society accelerates and the low interest rate environment has no end in sight, there has been increasing interest in investing in small and medium-sized commercial buildings in residential areas as a way to secure a stable income. Unprecedentedly low interest rates have brought about a change in the Korean real-estate investment paradigm as the pure Chonsei system (security deposit only, no rent) has gradually given way to a monthly rent system in the residential property market. This trend has also spread to the market for small and medium-sized commercial buildings in residential areas. Before making a decision to invest in such properties, there are many factors to consider, such as property-specific characteristics or the domestic and international investment climate, for instance. This study seeks to verify whether the operating income hypothesis, additional leverage effect hypothesis, and financial borrowing hypothesis exert an effect on the market for small and medium-sized commercial real estate in residential areas. The results of this study suggest that investors in small and medium-sized commercial buildings in residential areas try to maximize their investment income in various ways which support the operating income hypothesis, additional leverage effect hypothesis, and financial borrowing hypothesis (although indirectly). In conclusion, investors in these properties are influenced by domestic and international conditions according to which they adjust the ratio of security deposit to monthly rent in order to maximize investment income. Even after their initial investment, real estate investors continue to adjust security deposit and monthly rent amounts in response to changing economic conditions.