The Potential Risk Scale of Real Estate in Non-Bank Financial Sector Doubled in 4 Years

Real Estate Shadow Finance of 842 Trillion Won Including Real Estate Funds, Real Estate PF, and Real Estate PF Securitization Bonds

The Bank of Korea raised the base interest rate by 0.5 percentage points, and the real estate transaction market is expected to experience a prolonged freeze. On the 13th, a red light was on at a traffic signal near an apartment in downtown Seoul.

[Asia Economy Reporter Yu Je-hoon] The scale of 'real estate shadow finance' in South Korea's non-bank sector has nearly doubled over the past four years, raising concerns about potential risks.

According to estimates by the Korea Institute of Finance on the 9th, as of the end of September, the size of real estate shadow finance in the domestic non-bank sector was 842.3 trillion won. This represents an 87.3% increase compared to 449 trillion won at the end of 2018, four years ago.

The Korea Institute of Finance defines real estate shadow finance as non-bank real estate financial exposures that are not subject to soundness regulations at the level of the Group of Twenty (G20) countries but are involved in credit intermediation (non-bank financial intermediation), posing a high likelihood of systemic risk or regulatory arbitrage, thus requiring active policy responses. Specifically, this includes real estate fund assets under management, special asset fund assets under management, assets under custody by specialized real estate trust companies, real estate project financing (PF), real estate PF securitized bonds, and real estate PF debt guarantees.

According to the Korea Institute of Finance, real estate fund assets under management reached 138.2 trillion won, a 75.6% increase from 78.7 trillion won in 2018, while special asset fund assets under management also rose by 82.1% to 129.8 trillion won. Assets under custody by specialized real estate trust companies increased by 86.8% to 386.2 trillion won.

Exposure related to PF loans has also expanded. The scale of real estate PF loans by insurance companies, specialized credit finance companies, savings banks, and securities firms reached 84 trillion won as of the end of June, doubling from 42.3 trillion won four years ago. During the same period, real estate PF securitized bonds increased by 64.6% to 40 trillion won, and the scale of real estate PF debt guarantees expanded 2.5 times from 24.6 trillion won to 62.8 trillion won. The Korea Institute of Finance noted, "While it is difficult to say that the entire shadow finance scale is risky, the rapid increase is clearly a risk factor," adding, "With interest rates rising quickly and the real estate market deteriorating, preparations are necessary."

In particular, the Korea Institute of Finance expressed concerns about the possibility of insolvency in the commercial real estate sector. Commercial real estate typically has higher leverage ratios than residential properties and experiences greater volatility depending on economic conditions, with difficulties in recovering funds when prices fall. In the event of a downturn, there is a significant risk of chain bankruptcies due to business site insolvencies, redemption pressures on indirect investment products, and refinancing risks at maturity.

The Korea Institute of Finance emphasized the need to carefully review multi-faceted insolvency assessments and financing plans for each project site to prepare for the potential chain insolvency of secondary financial institutions that have engaged in excessive PF loans or debt guarantees with developers, construction companies, and subcontractors. It also advised, "It is necessary to secure additional emergency liquidity supply channels for non-bank financial institutions, such as bond stabilization funds, and to establish institutional measures that utilize private investment capital, such as listed REITs, to prevent excessive debt accumulation during real estate development financing."

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