[Why&Next] "Ddeungureum Jabun PF Sindiron"... Construction and Finance Both Reject

Construction Companies: "Conditions Are Too Stringent and Ineffective"
Financial Sector Hesitant to Provide Support Due to Heavy Risk Burden

The financial authorities have pulled out a 1 trillion won syndicated loan (joint loan) card to unblock the stalled capital circulation in the real estate project financing (PF) market, but more than six months have passed without any significant changes detected in the market. Although the financial sector raised as much as 1 trillion won last year, construction companies are waving their hands, saying it is ineffective. The financial sector is also hesitant to provide support, feeling burdened by taking on the risks of construction companies. Despite this situation, there are voices of criticism against the authorities for only raising expectations for market recovery without presenting effective measures.

◆ PF Syndicated Loan Execution Rate Falls Short of Half = A financial authority official said on the 5th, "I understand that only a single-digit number of companies that applied for the PF syndicated loan are currently undergoing review." Although the measure was introduced to resolve the capital stagnation in the market by raising PF syndicated loans, the pace is slow.

Last June, the authorities formed a 1 trillion won syndicated loan by involving five banks (NH, Shinhan, Woori, Hana, KB) and five insurance companies (Hanwha Life, Samsung Life, Meritz Fire & Marine, Samsung Fire & Marine, DB Insurance). This was a measure taken as the 230 trillion won PF market saw capital not circulating, raising the risk of a wave of bankruptcies among construction companies. The authorities plan to expand this to 5 trillion won in the future and increase it to 2 trillion won this year.

According to the authorities' plan, it seems possible to resolve the PF crisis with the syndicated loan. However, the execution rate of the syndicated loan currently stands at the 40% range (mid-to-late 400 billion won, across 4 projects). The official said, "It is a lower level than the authorities expected." Lee Bok-hyun, Governor of the Financial Supervisory Service, also emphasized the need for acceleration at last month's joint sale briefing for all financial sector PF projects, saying, "The pace of resolution has somewhat slowed."

◆ Construction Companies: "Support is either not provided where needed or is too stringent" = Construction companies evaluated the PF syndicated loan as ineffective. They see the conditions as too stringent. A senior official from a large construction company said, "If we could just get the funds, it would be advantageous in terms of interest rates and would help improve contingent liabilities." However, in reality, "It is too difficult to cross the threshold to get a loan." The syndicated loan is arranged with a bank as the lead manager. When a bank receives and accepts an application, it conducts a preliminary review. Then, it consults with other participating banks to decide whether to proceed. Since multiple institutions participate, the funding interest rate is relatively low. However, because unanimous consent from all participants is required, actual loan execution is difficult. The authorities continuously monitor the operation of the syndicated loan but cannot directly intervene in the funding decisions for individual projects.

Also, due to rising construction costs, the business feasibility has deteriorated, making financial sector support ineffective in reality. Another official said, "The core problem is not guarantees or loan interest rates but the skyrocketing construction costs," diagnosing, "Construction costs have risen so much that even if the project proceeds at an appropriate sale price, it is not profitable." He added, "After the developer or financial sector recovers funds, the remaining amount should cover the construction costs for the contractor, but under the current structure, this is impossible," and "Therefore, even if the government or financial sector buys PFs, it is not very effective from the contractor's perspective." For example, projects held by Taeyoung Construction, which entered workout last year, came onto the market but were not actually traded. The biggest problem was not guarantees or interest rate adjustments by the main lenders but the difficulty in generating profits due to soaring construction costs.

Some in the construction industry argue that supporting completion is more urgent than selling PFs. They say support is needed for places where completion is imminent or construction has already finished but funding is difficult due to unsold units. The PF syndicated loan promoted by the authorities focuses only on resolving and restructuring problematic PFs.

A construction industry official said, "Most problems are concentrated in the pre-construction stage, that is, sites that received bridge loans, so even if PFs are sold, direct benefits do not return to the contractors." He added, "After construction starts, a senior-subordinate structure is formed, and the contractor's recovery rank is pushed to the very end," emphasizing, "Ultimately, reducing the burden of unsold units through completion support and stabilizing project operations is a more urgent task from the contractor's perspective."

There are also criticisms that the financial sector's internal risk assessment models are inadequate. A researcher familiar with construction finance, speaking anonymously, said, "Even after talking with financial sector officials, frankly, they seem not to know well," and "Sometimes the financial sector asks which projects to select." He continued, "There are internal evaluation criteria, but rather than sophisticated models, simple standards are often used to judge business feasibility," pointing out, "The reality is a lack of precise risk analysis models."

◆ Financial Sector: "Should We Lend Money and Bear the Risks?" = The financial sector maintains a cautious stance, citing the heavy risk burden. A head of a commercial bank said, "We are actively participating in line with government policy," but added, "We are currently reviewing additional projects, but since unanimous consent from all participants is required, progress is inevitably slow."

Another executive from a commercial bank said, "Ultimately, the issue is whether the projects for sale can pass the financial sector's review," noting, "There is a high possibility they are not prime projects, so a cautious approach is necessary." He emphasized, "Not everything is solved just because banks step in," and "Contractors also need to actively compete for orders and improve performance, but construction companies are reluctant to do so."

The financial sector is reluctant to provide support due to the risk burden embedded throughout the construction industry. From the perspective that it is like pouring water into a bottomless pit because of the high-cost structure caused by rising construction costs, it is difficult to expect profits. Professor Heo Jeong of Sogang University's Department of Economics said, "Projects won by construction companies have transformed into a high-cost structure over the past year, making it difficult to secure business feasibility even if syndicated loans are provided," and "Banks also find it difficult to supply funds to the PF market burdened by rising construction costs." He added, "Other financial institutions such as securities firms have not expanded PF loans, making banks virtually the only lending channel," but "Banks are raising loan thresholds due to risk concerns, effectively only pretending to provide support."

However, there are limits to how much the authorities can improve this situation. A financial authority official explained, "Since they cannot forcibly push bad projects onto the financial sector, they only send indirect signals like 'these projects are available, please review them,'" adding, "Considering this reality, a more flexible approach is needed," and "We hope the financial sector adjusts conditions and actively seeks solutions."

The PF syndicated loan is a product where multiple financial institutions jointly raise funds, resulting in relatively low interest rates. Also, it is a stable product for long-term fund management as it facilitates the conversion from bridge loans to main PF loans.

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