[Why&Next] Crisis of PF, Ahead of Regulation Strengthening "Should Raise More" VS "Excessive"

On the 11th, the fate of Taeyoung Construction, which applied for a workout (corporate restructuring) after failing to repay real estate project financing (PF) loans worth about 9 trillion won, is being decided, creating tension at Taeyoung Construction in Yeongdeungpo-gu, Seoul. Photo by Jo Yongjun jun21@

The government is expected to raise the equity ratio requirement for project financing (PF) by developers based on the results of a research project scheduled for April, sparking divided opinions. While academia argues that the proposed increase in capital requirements is too low to be effective, the industry voices concerns that it could lead to a contraction of PF projects and a decrease in housing supply.

Government to Strengthen Developers' Capital Requirements?

According to the Ministry of Land, Infrastructure and Transport on the 19th, the Ministry of Economy and Finance and the Ministry of Land, Infrastructure and Transport commissioned research on overseas cases related to real estate PF to the Korea Development Institute (KDI), the Korea Institute of Public Finance, and the Korea Research Institute for Human Settlements last October. The research, aimed at improving the domestic PF project structure, is expected to propose appropriate equity ratio standards for developers when conducting PF projects based on overseas examples.

Already, Choi Sang-mok, Deputy Prime Minister and Minister of Economy and Finance, hinted at strengthening capital requirements for developers during a TV program on the 21st of last month. Deputy Prime Minister Choi pointed out the problem with Korea-style PF, saying, "In advanced countries, PF basically involves purchasing land with equity and then raising finance to build or operate projects, but in Korea, assuming 100 units of money, only about 5% is equity and the remaining 95% is borrowed to buy the land first." He added, "We will simultaneously work on fundamental structural improvements to the PF system through the research project."

As he mentioned, domestic developers mostly cover project costs through loans (PF), making them vulnerable to liquidity shocks, and when shocks occur, the crisis often spreads to the general contractors who provide debt guarantees. Typically, domestic developers proceed with PF loans securing only 5-10% of equity through contractors' debt guarantees. Notably, despite developers undertaking construction projects worth trillions of won, the fact that a developer can be established with only KRW 300 million in corporate capital or KRW 600 million in personal asset valuation under the Housing Act Enforcement Decree acts as a loophole. This has raised concerns that a second Tae-young Construction incident could occur at any time.

Taeyoung Construction, which is experiencing a liquidity crisis due to real estate project financing (PF), has applied for a workout. On the 5th, the construction site of Taeyoung Construction's Seongsu-dong development project located in Seongdong-gu, Seoul, has come to a halt. Photo by Kang Jin-hyung aymsdream@

Academia: "20% Equity Ratio Is Too Low"

The market expects the government to push for a policy requiring developers to cover 20% of the total project cost with equity when pursuing PF projects.

However, academia evaluates this as too weak to change the current developer landscape. Even if the equity ratio is raised, developers without sufficient capital will continue to carry out development projects, repeating the same issues.

Professor Son Jae-young of the Department of Real Estate at Konkuk University said, "The problem with PF is that developers proceed without equity and shift risks to construction companies and others," adding, "The equity ratio should be increased so that developers with a certain level of capital strength engage in real estate development." He further suggested, "Methods such as requiring developers to be responsible for 30% of the land price should also be considered," emphasizing the need to increase developers' equity contributions.

Compared to foreign cases, the regulatory intensity is weaker. According to a report titled "Problems and Implications of Korea's Real Estate PF Structure" released by the Korea Institute of Finance in June last year, in the U.S., developers prepare about 30% of the total project cost, and the loan ratio for land acquisition is around 40%. Professor Han Moon-do of the Department of Real Estate at Seoul Digital University said about the government's PF regulations, "While the creditworthiness and stability of developers will improve, it is still insufficient compared to overseas cases."

Industry: "PF Market Could Shrink"

On the other hand, there are concerns that regulating developers' equity ratio above 20% could shrink the PF market itself.

Researcher Lee Eun-hyung of the Korea Construction Policy Institute said, "The higher the capital ratio, the harder it may become to conduct PF projects," adding, "Even a 20% equity ratio could be sufficiently effective." He continued, "After PF problems occurred in the secondary financial sector, including savings banks, the equity ratio of developers borrowing from savings banks increased. This policy is also being reviewed based on that precedent."

Within the industry, there is a sense of burden regarding the increase in developers' equity ratio. A representative from the Korea Real Estate Development Association said, "If a project worth KRW 500 billion is undertaken, KRW 100 billion must be prepared, which is not easy," adding, "Member companies and other developers also feel the burden." The representative added, "If the developers' equity ratio rises, PF projects could shrink, potentially causing problems in future housing supply."

A developer representative said, "There are not many developers with strong capital," adding, "From the developers' perspective, they have no choice but to use bridge loans, and if they are required to secure 20% of the project cost, the development projects themselves could become difficult."

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