CE Insights || Real Estate in North Korea (1): Understanding Real Estate in North Korea

Guest Post by Tay Tian Wen, Analyst at Choson Exchange

In theory, any discussion about real estate in the DPRK would quickly fizzle out before it even begins. Why talk about real estate in a state that is ideologically opposed to private property ownership?

Because both President Trump and Marshal Kim Jong Un have already made it a point to. In his remarks during the June 12th Summit in Singapore, President Trump lavished praise on the DPRK’s real estate potential; In May 2018, Kim Jong Un commissioned the construction of a world-class beach resort in the Wonsan - Kalma Coastal Tourist Area. The message here is unambiguous -- real estate holds a lot of promise for the DPRK’s growth prospects.

Beyond individual vision, real estate in the DPRK is a highly nuanced topic that has witnessed transformative trends since the 1980s. Yet perhaps more interesting than what these trends are, is why these trends are happening. How did real estate in the DPRK come about in the first place? Why has there been a surge in real estate investment in the DPRK? How will this affect relevant industries? These are but a few of the many questions our insight series on real estate in the DPRK seeks to answer.

In the first instalment of this 3-part series, we take a look at a brief history of real estate, and one way in which a real estate project can be undertaken  in the DPRK.

The Origins of Real Estate in the DPRK
The use of the term “real estate” in the DPRK apparently started to gain traction only in the 1990s following what particular observers have denoted as trends towards a limited “economic opening”. While real estate in the DPRK have certainly become more visible in the 1990s, it was developments as far back as the 1980s that are more significant in explaining the evolution of real estate in the country.

In principle, all costs incurred over the duration of a construction project have traditionally been covered by the state, and private property ownership is still forbidden by DPRK law. Growing economic pressures in the 1980s, however, placed significant financial strain on the state’s ability to finance these construction projects at the national level, and eventually it was decided that part of the financial burden should be shouldered by “institutional enterprises” at the district level.

These “Institutional enterprises” are essentially run by individual state ministries or agencies that have excess financial capacity.  Some of these “institutional enterprises” did not specialise in the construction industry, but possessed more than sufficient funds to finance construction projects in their respective districts. These “institutional enterprises” oversaw the construction of housing for their employees, so much so that the cumulative growth in residential developments could  apparently accommodate the sudden increase in housing demand as post-war baby boomers in the DPRK reached marriage age. Since the central state body was no longer the sole authority in deciding and authorising real estate projects, there was a degree of decentralisation within the formal, state-controlled command economy.

In the 1990s however, the collapse of the soviet bloc and sudden loss of financial support from the Soviet Union, coupled with domestic economic troubles, resulted in a debilitating double whammy against the DPRK’s economy. Where “institutional enterprises” used to take charge of legal, administrative and financial aspects of a real estate project, a severe shortage of funds meant that financing had to be partially solicited from “donations” via informal loans. “Donations” are then pooled together in a fund and used for material procurement, and because the “donors” comprise part of the overall input, they are often included in the construction process in a supervisory role. A example of this would be prospective home-owners in the DPRK whose “donations” partially fund the construction of their new homes: these home-owners, in their capacity as “donors”, act as supervisory oversight.

“Institutional enterprises” do not physically participate in the construction process; in their capacity as “executing companies” (시행사), they simply account for legal and administrative aspects and are held responsible for any financial liability. As “Executing companies”, they will procure the construction services of a contractor (시공사) , who undertakes the physical construction of a real estate project. In essence, there is a division of responsibilities between both public and private actors

Additionally, the enactment of the Housing Act (북한살림집법) in 2009 led to municipal governments conferring residency certificates (입사정) to “all residents”. These residency certificates allegedly do not expire, All property is still under state possession, but with the introduction of residency certificates private individuals in North Korea can engage in an indirect form of real estate transaction by buying and selling residency certificates. There are multiple accounts of what sort of property rights these residency certificates confer, but Andrei Lankov, a professor at South Korea’s Kookmin University and a leading authority on North Korea, asserts that North Koreans enjoy “[rights] to control and manage a property, to dispose of it … to derive an income from the property, and to restrict access to it”.

As real estate continues to evolve in North Korea, new possibilities arise. Real estate trends in North Korea are informed by exposure to best practices from around the world, and the North Korean experience with real estate (and urban planning) lend new insights to the broader discussion as well. Choson Exchange is a proud facilitator of this exchange of ideas:  In our Real Estate and Urban development workshop conducted in July 2017, one of the winning ideas was a green building complex; our 2014 workshop in Vietnam also exposed participants from the DPRK to best practices in land-lease/sales issues and the wider scope of interconnected topics such as land planning, tourism development and regulations. Real estate in the DPRK is now a space shared between public and private actors, and the steady growth in local expertise provides optimism for a gradually mature real estate sector in the country.

Parallels with Chinese Real Estate

While the Chinese experience with real estate and property rights differs significantly from the DPRK, the two cases are not without similarities. In both China and the DPRK, real estate markets and the concept of private ownership only began to manifest in the early 1990s; in China’s case however, it should be noted that this only applied to urban land. A different set of rules govern rural land ownership, and delving into these rules will deviate far from the intended scope of analysis.

Additionally, private ownership of land is also prohibited in China and individual citizens may only obtain land-use rights which are valid for a specific time period (presently 70 years for urban land-use rights granted for residential purposes). These rights, according to China’s Property Rights Law, enable Chinese citizens to “legally possess, use, and benefit from property owned by another” - terms similar to property rights conferred to DPRK citizens. Chinese citizens, however, can also legally own residential spaces built on the land that is owned by the state; this only applies in a de facto sense for DPRK citizens.

The role of the state in managing real estate and private property rights has also seen similar shifts in both China and the DPRK. Just as decentralisation meant less state oversight in the DPRK, the trend in China was also towards less intensive “supporting and guiding” of private ownership and away from “supervising and managing”.

Another similarity between China and the DPRK is that property rights are physically conferred to private owners in the form of transferable certificates issued by local authority. It is unclear what sort of real estate transactions DPRK citizens can engage in; for the Chinese, real estate can be transferred by means of sale, as a gift or other legal means. In both cases, the transfer of land use rights also results in the simultaneous transfer of home ownership.

Real Estate Roles and Procedure in the DPRK

According to the definition of “executing companies” provided by the DPRK Institute of Social Science, “executing companies”:

(1). are obliged to ensure proper documentation of budget and design as well as timely funding of construction work

(2). are obliged to ensure quality of construction work

(3). can only collaborate with the contractor stipulated in the contract entered into

(4). will be held directly responsible for any liabilities incurred during the construction process.

Other actors, such as specialised design agencies, construction contractors and individuals engaged in informal loans, provide the relevant inputs and are all coordinated by the “executing company”.

As stipulated by the 2009 Housing Act (북한살림집법), one possible procedure for a construction project in the DPRK is as follows:

(1). The state will select an “executing company” to undertake a particular construction project

(2). The selected executing company will then seek approval to proceed with the project from relevant government organisations. In order to secure approval, the executing company must obtain a land use permit and construction permit. The construction permit lays clear key specifications of the construction project.

(3). After the executing company obtains the relevant documents and is approved to proceed with the project, it then goes to a specialised urban construction design agency and enters into a design contract.

(4). After the design has been approved by the National Construction Supervision Agency, the “executing company” will enter into a contract with a contractor providing construction services (시공사).

(5). During the construction process, both the contractor and the “executing company” will conduct routine inspections to ensure construction quality

(6). Upon completion, the “executing company” must submit an application for a “completion inspection” by the National Construction Supervision Agency. The agency will only issue a “Notification of Acceptance” if the project satisfies inspection standards. At the same time, documents such as the land use permit, construction permit, geological survey reports and design drawings must all be handed over to the state.

In summary, real estate in the DPRK comprises a network of public and private actors engaged in a division of responsibilities that is determined and coordinated by the over-arching authority of a state-selected “executing company”. Ambiguity is done away by a clear assignment of responsibilities, and a proper procedure to follow. While there is a historical trend towards greater private participation in real estate projects, it remains to be seen if private individuals will more deeply involved in future.

In the next part of this series, we examine factors that explain real estate pricing and investment in the DPRK, and highlight where real estate investments in the country are concentrated in.


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