The Former Ssangyong Motor Site in Guro Becomes a Burden... "Can't Sell It, So What About the Interest?"

Acquired for 196.1 billion KRW and pushing for resale after 1 year and 6 months, aiming for a profit of over 100 billion KRW
Adding resident proposals to the existing district unit plans for Guro Station and Sindorim Station areas
Claims to proceed with self-development but questions remain about bearing annual financial costs exceeding 10 billion KRW

[Asia Economy Reporter Cha Wanyong] PIA, an asset management company that purchased the former Ssangyong Motor service site around Guro Station, recently attempted to sell the site but withdrew the sale. Although active negotiations were held with a development company, the deal fell through due to differences over the sale price.

Ultimately, PIA decided to withdraw the sale and proceed with self-development. However, they now face the burden of interest costs on project financing (PF) loans exceeding 170 billion KRW, operating expenses, and complex permit procedures. Industry insiders predict that the site will likely be put back on the market soon.

Colder-than-expected response, sale ultimately canceled

According to the real estate investment industry on the 25th, PIA put the former Ssangyong Motor service site (18,089㎡, purchased in June 2020) on the market right after the conditional approval of the district unit plan for the Guro-dong area around Guro Station and Sindorim Station in December last year. Although the exact sale price was not disclosed, industry rumors suggest that PIA demanded around 300 billion KRW under the pretext of building a knowledge industry center.

Previously, PIA had purchased the site from Ssangyong Motor for 196.1 billion KRW in 2020, indicating they expected a profit of over 100 billion KRW within 1 year and 6 months.

There were clear positives. After acquiring the site, PIA immediately pushed for the construction of a knowledge industry center spanning from four basement floors to 17 above-ground floors. To this end, they obtained conditional approval from Seoul City through a resident proposal method that included nearby road construction and library establishment, based on the district unit plan for Guro Station and Sindorim Station areas established in 2016. The real estate industry also viewed this as a positive development, anticipating land price increases in the area.

However, soaring interest rates and a sluggish real estate market hindered progress. Particularly, project financing (PF) loan funds were frozen by financial institutions, resulting in little interest from developers. Only two parties showed interest, but there was a significant gap in sale price expectations, and one party reportedly withdrew during the PF loan review process.

Another negative factor is the likely extension of the permit approval period. Since the site involves district unit plans and resident proposal developments, separate negotiations with the local district office’s architecture department, residents, and urban maintenance department are required for permits. Given the high sale price, much of the project will need to be financed through PF loans, and the longer the project period, the lower the profitability.

Annual financial costs exceed 10 billion KRW, will it be back on the market early next year?

In fact, PIA spent over 10 billion KRW on financial costs for the site last year. The annual interest cost on the 177.6 billion KRW PF loan taken to purchase the site was 8.25691 billion KRW, and operating expenses were 2.02414 billion KRW. Operating expenses are expected to increase further this year as the project proceeds.

At least PIA has a sale and leaseback agreement with Ssangyong Motor, so there is no immediate loss. Ssangyong Motor prepaid 21.6 billion KRW in rent for a two-year usage period and extended the lease by one year, giving PIA some breathing room until June 28, 2023. Currently, PIA allocates the rent received from Ssangyong Motor to cover PF loan interest and operating expenses over time.

The problem starts next year. Without operating profit aside from Ssangyong Motor’s rent, the huge interest and project costs will result in losses. Moreover, the complex permit process is expected to delay construction start, making it difficult to estimate losses until project completion.

Additionally, since a large PF loan has already been taken, securing project funds after construction begins will be challenging. Fortunately, Hyundai Construction and Hyundai Motor Securities have invested 22.22% and 25% equity respectively in PIA Guro Station PFV, a special purpose company established by PIA for this project. Asia Trust and Genstar Mate also participate as preferred shareholders, each acquiring 2.78% equity.

With Hyundai Construction and Hyundai Motor Securities’ equity investment, PIA was able to secure a 177.6 billion KRW bridge loan from a consortium including Woori Comprehensive Finance, Kiwoom Capital, Seongnam Sujeong Saemaeul Geumgo, OK Capital, HBPJ Cha, and Invest Guro Jeil Cha.

The real estate investment industry predicts that PIA will attempt to resell the site before the Ssangyong Motor lease period ends. An industry insider said, "If the real estate market improves and there is confidence in successful self-development, taking risks is acceptable. But in uncertain times like now, it’s best to exit while land prices are still high. It seems PIA thought the same, which is why they tried to sell, and they are likely to try again before rental income stops."

PIA responded, "We decided to withdraw the sale and proceed with self-development, and are currently discussing permits and related matters with the local district office. Although the huge financial costs are burdensome, we judged that self-development would yield higher returns than selling."

Meanwhile, some experts point out that practices like PIA’s?raising land prices through development projects and then reselling?contribute to real estate price increases and negatively affect redevelopment projects due to frequent changes in developers, calling for regulatory improvements.

This content was produced with the assistance of AI translation services.