Treasuring the ‘Treasure Island of Korea’: A Cautionary Tale of Chinese Real Estate Development in Jeju Island
Home to the highest mountain in South Korea, the world’s longest lava caves, and unique lava forests, Jeju Island is the only place on Earth to receive all three UNESCO designations in natural sciences.
In 2010, the ‘Treasure Island of Korea’ became a trial site of the Investment Immigration System. Under this system, non-Korean nationals are given F-2, a pre-permanent resident status, for purchasing $500,000 USD in certain real estate units, including condominiums, hotels, or vacation houses for tourists in a Ministry of Justice-designated investment area. The immigration status is then upgraded to F-5, or permanent residency, in five years.
This perk created an immediate surge of Chinese capital. Jeju is particularly attractive to Chinese middle- and upper-class families who are eager to escape the pollution and congestion in the mainland, and feel insecure about their property rights at home. Since the implementation of the Investment Immigration System, Chinese land ownership increased by an incredible 483.7% between December 2011 and 2014. By the end of December 2015, 73% of foreign-owned buildings were under Chinese ownership. The numbers may even be higher in reality, given that many Chinese buyers purchase land through a Korean friend or agent to get around registration requirements, or to hide overseas property from the Chinese government.
Public reaction in Korea to the sudden increase of Chinese land ownership has been characterized by panic and concern. “Chinese Money Gobbles Up Jeju Island,” “Will Jeju be a Chinese Garden in Twenty Years?” and “Are We Just Going to Sit and Watch Mr. Wang’s Grab All the Land in Jeju?” are some of the media headlines that gained much public attention. In a 2015 survey conducted by the Jeju Provincial Government, 40% of Jeju residents responded that China-targeting investment efforts are “grossly inappropriate.” Woo Geun-Min, a former Jeju Governor and a leading advocate of the Real Estate Investment Immigration System, decided not to run for re-election when his support fell to an embarrassing 9% amidst allegations that he took bribes from Chinese investors to “sell off” the island.
In the context of rising foreign investment and international business transactions worldwide, the detrimental effects of an abrupt influx of Chinese real estate investment in Jeju warn policymakers to be mindful that long-term consequences may outweigh short-term benefits to the economy. There are three key areas of concern fueling the backlash: limited value added to the local economy, eviction of long-term tenants, and environmental consequences. Characteristics of investment patterns, rather than the nationality of the capital, appear to be the root cause of these problems.
Limited value added to the local economy
Most investment from China comes in the form of large development projects of resort towns and condominiums targeting Chinese customers. Of over 4,700 cases of land purchased by Chinese investors, roughly 80% are vacation or resort-style buildings for lease; less than 10% of these purchases are for individual homes.
However, the resorts and tourist-focused accommodation that form the bulk of Chinese real estate investment add only limited value to the local economy. Construction of hotels and entertainment facilities targeting the Chinese exacerbate the problem of the so-called ‘Chinese Circle’ in Jeju tourism that excludes local businesses from profiting. Furthermore, there is very little indication that Chinese investment has created meaningful employment opportunities for Jeju residents, since many employees are hired only on temporary contracts or outsourced from China or other cities in Korea. Moreover, tax benefits given to Chinese enterprises are grossly generous. For instance, duty-free shops, which many hotels run alongside their accommodation services, have paid a total income tax of only $250,000 between 2010 and 2013; during the same period, their revenues reached $33 million. These are clear indications that Jeju is failing to capture the gains of Chinese investment in the island.
The Korean Ministry of Land, Infrastructure and Transport’s estimates of the “benchmark price” (a measure of the value of a “typical property” in the region) demonstrate that the land value in the island increased more than 40% between 2012 and 2016. But market price rose more dramatically, because Chinese buyers are willing and able to pay three or four times the market price.
The lure of Chinese money has forced many tenants to the streets. Small business owners in popular shopping districts are kicked out by their landlords through a variety of tactics in order to give space to Chinese buyers who are willing to pay much higher prices. One widely known example is Baozhen Street, where Chinese businesses are eager not to miss lucrative tourist sales; rent there has risen 50 – 250% since 2011. Some estimate that the rent usually increases 50-100% in buildings that change ownership from Korean to Chinese.
Moreover, as Chinese investors are generally interested in large-scale opportunities, they attempt to buy all units of a building, or multiple buildings in a given area. As a result, merchants who occupy single units in a building are under augmenting pressure to leave. Reluctant evictions under compulsion are only expected to be more frequent as investment becomes more saturated, and land less available.
The most significant and widely-shared concern about Chinese real estate development is environmental damage. Chinese-owned land is dispersed throughout the island in both coastal areas and traditionally protected environmental districts, development of which was allowed amid growing pressure to meet the demand for land.
At the center of environmental woes is the damage to the Middle Mountainous Regions. These regions surround Mount Hallasan at the center of the island, and are some of Jeju’s most diverse ecosystems. In particular, gotjawals (lava forests) that populate the region are extremely valuable; they are the only forests in the world where both tropical and polar plants grow, thanks to the uniquely formed volcanic rocks that preserve heat and moisture in certain corners.
Unfortunately, Middle Mountainous Regions are more attractive than inner-city areas to Chinese investors because there are less regulations on construction compared to more populated areas. Land is also less expensive, yet have more scenic views. Moreover, there are more large, communal lands, making bigger purchases easier. Finally, there are ample opportunities for further expansion as many areas remain undeveloped. As a result, an estimated 32% of gotjawals has already been destructed to make room for golf courses, entertainment museums, and resorts.
The continuing destruction of gotjawals and other environmental treasures of Jeju Island would have serious, lasting consequences. Besides being the ‘lungs’ of the island by providing oxygen, gotjawals’ reserves of underground water serve as the main source of drinking water for islanders. Mass demolition of forests destroys the unique ecosystem of the island. Considering that Jeju’s natural resources have been formed over centuries of volcanic activity and unique landscape, such environmental loss would not be easily recovered.
Treasuring the “Treasure Island”: A New Direction for Jeju
What should the Jeju government change to promote sustainable, healthy development? Modifications to investment immigration policies in other countries facing similar problems may serve as guidance.
Comparative modifications in other countries
Countries often make a distinction between an Investment Immigration System and a Real Estate Investment Immigration System. In fact, it is rare to find a healthy, well-functioning economy providing immigration visas for purchases as low as $500,000. Jeju is not alone in facing problems caused by a sudden influx of foreign capital in real estate. Countries with comparable investment immigration policies have recently withdrawn or modified them amidst growing concerns that the investment adds little to the economy and creates an unaffordable housing crisis. Facing a surge of Chinese investment immigration, Australia increased the minimum investment requirement to $5 million Australian dollars in 2012. When Chinese-run casinos started to overtake local hotels and entertainment businesses, Laos prohibited Chinese casinos in the country in 2012. Singapore eliminated immigration visas for real estate entrepreneurs in May 2013, after housing prices started to grow out of hand.
Canada’s example may be of particular interest to Jeju. From the early 2010s, Canada began discussing reforms to its investment immigration policy as foreign capital started to price young families out of the market, especially in Vancouver. More than 80% of this capital driving up housing prices is flowing in from China, Taiwan, and Hong Kong. Under the original framework, applicants received permanent resident status after six or more years if they had $1.6 million CAD in capital at the time of application and put up $800,000 CAD (raised from $400,000 in 2010) to the federal government at no interest. However, concerns over, inter alia, the housing market bubble led to a suspension in accepting new applications altogether in July 2012. Applicants now need $10 million in order to qualify, and must invest $2 million in a Canadian venture capital fund over fifteen years. They must also demonstrate language abilities (English or French), a college degree, and demonstrable entrepreneurial experience; permanent residency is granted within six months if the application is accepted. These revisions largely succeeded in cooling the Chinese investment frenzy.
Curbing current investment levels
The surge in housing prices and deterioration of communities are among the challenges faced by Jeju Island as well. Perhaps the easiest problem to address is the increase of land purchase for real estate development. Scholars agree that the sudden and dramatic nature of investment made it more detrimental, as the government had little time to modify its regulations in response to the arising consequences. Fortunately, reducing incentives for investment immigration has immediate and significant impact on demand. For instance, the Jeju Provincial Government increased the property tax from 4.6% to 13.4% for property acquired under the Investment Immigration System in 2015, which decreased investment immigration by 80% that year. Heightened property tax is a commendable change not only because it cools down the investment frenzy, but also because it allows the government to reap more benefits from the investment that are currently being lost to the ‘Chinese circle’ of profit. Similar initiatives of making real estate purchases less attractive would further cool the heat of Chinese investment.
Enhancing regulations for environmental protection and preservation of Jeju landscape
One way of protecting the most vulnerable and valuable environmental areas is dividing the island into different zones, each with its own investment regulations reflecting its current status of development and natural traits. For instance, areas that are 200 meters or more above sea level are generally of heightened environmental value, as they mostly fall under the middle mountainous regions. Their landscape is also unique to Jeju and reflects the special character of the island. As a principle, these areas should be preserved by being designated as special protected zones. For more densely populated areas within the city, limits on the height and width of buildings, or other specific design guidelines on construction, could be placed to preserve the unique landscape of the island. The regulations should also take into account the needs of current residents; for instance, the government could require proposed for-profit hospitals to show that there is a demonstrated demand in the community for certain services. This is one way of ensuring that development projects are carefully planned and constructed.
In addition, it would be wise to implement a total per capita investment limit to ensure that the landscape of Jeju is preserved, and to caution against concentrated regions of foreign capital that alienates the rest of the Jeju community. To help prevent the invasion of traditional communities like the unfortunate case of Baozhen Street, the government would be well-advised to limit foreign investment in certain areas that have already received saturated Chinese capital.
The Jeju Free International City Special Law states in Article 1 that the purpose of the law is to “promote Jeju Island’s regional, historic, humanistic specialties and to establish a special self-governing province with its own governing rights on the basis of autonomy, responsibility, creativity and diversity.” The introduction of a Real Estate Investment Immigration System has achieved exactly the opposite, leading Jeju in an unsustainable, ill-fitted direction of becoming a “global” city that disregards its unique value as an environmental and cultural treasure. Given the demonstrated problems posed to the local economy, environment, culture, and community of Jeju Island, significant reforms to the investment immigration policy are needed immediately.
 Interview with Tae-Ho Ko at Jeju Development Research Institute.
 Jeju Development Institute, Jae Ee Cha Jeju Gukjae Jayoo Dosi Jonghab Gaehyoik Pyungga [Second Comprehensive Plan Evaluation of Jeju Free International City], 37 (2015).
 Interview with Young-Shin Chung of Jeju National University (Social Science Korea Research Team). Although Americans remain the largest foreign land owner in Jeju Island, scholars are much less worried about their impact because most investors are buyers of individual private property, and cause little damage to the environment
 Tae-Il Kim, Jeju Eui Gaebal, Eedaero Joeunga! [Jeju’s Development, Is Status Quo Sustainable!], 2014 Yeurushi Hamggae Suppi Doeja 53 (S. Kor.) 22, 45.
 Many Chinese tourists now come to the island under Chinese-owned and operated tourism packages that are offered at extremely affordable prices, staying in Chinese-owned hotels and restaurants. Chinese travel agencies work almost exclusively with Jeju agencies that are themselves Chinese-run and operated. Big Chinese enterprises investing millions into tourist destinations and accommodation are now going to enter this loop of Chinese profit-making.
 Hyun-Gook Kim, Joonggook Jabon Tooja Mit Guangwang Munjaejumgwa Gaesun Bangan [Problems with Chinese Capital Investment and Tourism and Solutions], 2013 Yeurushi Hamggae Suppi Doeja 52 (S. Kor.) 8, 34.