[Real Estate PF Crisis] 'Real Estate PF Normalization Plan' to be Released in April

Increase in PF Project Sites Worsened by High Interest Rates and Rising Construction Costs
Meeting with Construction Industry, Lee Bok-hyun Says "Normalization Work Possible in Q3-Q4 After Announcing Normalization Plan"
Dismissing April Crisis Rumors: "No Need to Worry"
Experts Say "Short-Term Drastic Changes in PF Market Difficult"... Full-Scale Reforms Expected After General Election

[Image source=Yonhap News]

The financial authorities will unveil a plan in April to normalize real estate project financing (PF) and begin efforts to rehabilitate distressed projects. This move is interpreted as a determination not to miss the golden time as the number of PF projects severely deteriorated due to high interest rates and rising construction costs gradually increases. Experts also diagnose that it is difficult for the real estate PF market to improve dramatically amid delayed real estate recovery, and places with weak financial soundness due to PF distress will inevitably be affected, predicting that full-scale restructuring of the PF market will begin after the general election.

On the 21st, Lee Bok-hyun, Governor of the Financial Supervisory Service, met with reporters after the 'Meeting with Financial and Construction Sectors to Promote Real Estate PF Normalization' held at the Housing Construction Association Hall in Yeouido, Seoul, and stated, "We will publicize the criteria for business feasibility evaluation and the restructuring plan for creditor consortium agreements in April." Based on the restructuring plan, the financial authorities plan to gather various opinions from financial companies, construction firms, and associations between April and May. Governor Lee added, "By May to July, the market should at least accept what restructuring and normalization mean to remove uncertainty," and "If the plan prepared over five months is actually implemented, normalization work can be carried out in the third to fourth quarter."

Regarding the 'April crisis theory,' which suggests that many mid-sized construction companies may enter court receivership in April, he dismissed concerns, saying, "There is no need to worry." Governor Lee acknowledged, "We are well aware of concerns that problems may arise in some financial and construction companies," but emphasized, "The likelihood of issues that could act as systemic risk factors or liquidity crises in construction companies materializing within the first half of the year is low."

The financial authorities plan to revise various evaluation criteria and improve unreasonable systems to put distressed projects back on track. They will also inspect on-site whether PF interest rates and fees are being reasonably charged. The current three-tier classification of 'Good (normal in asset soundness classification) - Normal (watchlist) - Deterioration Concern (substandard or below)' is under discussion to be subdivided into four stages: 'Good - Normal - Deterioration Concern - Doubtful Recovery' for business feasibility evaluation. Projects classified as 'Doubtful Recovery' will require higher provisioning to facilitate early or public sales. The revision of creditor consortium agreements will strengthen maturity extension criteria while relaxing conditions for early or public sales to support 'sorting the wheat from the chaff.'

Governor Lee explained, "We are focusing on inducing project restructuring and reorganization through early or public sales and promoting the cleanup of distressed projects by revising business feasibility evaluation criteria and creditor consortium agreements," adding, "We will review PF interest rates and fees from the perspective of fairness and common sense and strive to reduce the financial burden on the construction industry."

He also urged the financial sector to act swiftly. Governor Lee said, "The financial sector should continue to create best practices centered on financial holding company affiliates to activate restructuring and reorganization, and it is necessary to consider expanding the scale of the financial sector's normalization support fund," adding, "The financial sector has conveyed plans to quickly proceed with funds operated by each financial holding company and, if necessary, prepare a second restructuring fund."

[Image source=Yonhap News]

Financial and real estate experts advised that, despite Governor Lee's recent efforts, the PF market is unlikely to undergo a dramatic transformation in the short term, and comprehensive government efforts are necessary. Kim In-man, Director of the Real Estate Economy Research Institute, said, "From the demand side, the real estate market has improved, but from the supplier side, PF loans are still very difficult," adding, "Since it is uncertain when conditions will improve, this is not a problem that can be resolved by enduring for a month or two. The crisis is ongoing, so how it is managed going forward is important."

An official from a financial research institution, who requested anonymity, said, "It is true that the market continues to be sluggish this year. Given the delayed recovery of the real estate market, I think it is difficult for PF to improve dramatically," and analyzed, "The Financial Supervisory Service is also encouraging financial institutions to quickly clean up distressed projects to help the market recover, but the outlook for this year is bleak."

They predicted that restructuring of the distressed PF market will intensify after the general election. They assessed that it is best if the PF market does not worsen further, but even if it does, it is not something the government can forgive. Director Kim said, "After the general election, small and medium construction companies may enter court receivership, workout (corporate financial restructuring), or bankruptcy," adding, "I believe the government will do whatever it can to prevent it from escalating into an economic crisis." He further explained, "Large and mid-sized construction companies, which are not conglomerates, will struggle as construction is their main business," and "specialized construction companies will be exposed to even greater risks."

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