Korea Ratings: Securities Firms Improve Real Estate PF Quality Over Past Year, But Risks Remain for Smaller Players

Credit rating agencies have assessed that the securities industry is making progress in improving the quality of real estate project financing (PF), which has been blamed for poor performance in recent years. However, they also point out that the overall exposure remains large, so it is not yet time to be complacent. It has been confirmed that small and mid-sized securities firms, in particular, are still grappling with real estate PF risks, as they have a relatively high proportion of problematic assets.

According to an analysis by Korea Ratings on the real estate PF risk of 22 securities firms whose credit ratings it evaluates, as of the end of June, the PF exposure (amount at risk) of these firms stood at 21.6 trillion won, up from 18.5 trillion won a year earlier. The ratio of PF exposure to equity capital among securities firms also rose from 28% at the end of June last year to 30%, increasing the overall quantitative burden by 2 percentage points.

However, the qualitative burden has eased. When real estate PF is classified by risk level as "sound," "average," "caution," and "potentially distressed," the proportion of non-prime assets categorized as "caution" or "potentially distressed" fell from 19.1% to 14.2% over the past year. This is attributed to the securities industry focusing on new orders for high-quality projects with a high likelihood of capital recovery over the past year. By concentrating on real estate projects in stable regions and asset types, they have reduced the proportion of high-risk assets.

By region, the proportion of real estate projects in Seoul rose sharply from 19.1% to 30.2% over the past year, an increase of 11.1 percentage points. In contrast, the share in non-metropolitan areas declined by 6.4 percentage points from 43.6% to 37.2%. The proportion in Gyeonggi and Incheon also dropped by 4.7 percentage points from 37.3% to 32.6%, confirming an overall trend of PF concentration in Seoul. By asset type, office buildings increased from 5.0% to 14.1%, a rise of nearly 10 percentage points, while the share of apartments, considered a stable asset, edged up from 54.8% to 55.2%. Conversely, the proportion of high-risk asset types such as officetels, logistics centers, serviced residences, and hotels and resorts decreased as securities firms wound down existing PF in these categories.

By loan type, the proportion of bridge loans, which are relatively more prone to delinquency, fell from 30.6% to 23.7% of all PF over the past year. The share of subordinated and mezzanine loans based on repayment priority also dropped from 54.5% to 44.3%. As a result, the value of new PF orders for selected high-quality projects over the past year reached 10.4 trillion won, exceeding the 9.2 trillion won in PF from projects that ended during the same period, indicating an overall qualitative improvement.

However, small and mid-sized securities firms are still exposed to real estate PF risk. This is due to their relatively high proportion of problematic assets and a lack of new project orders. Yoon Minsoo, a researcher at Korea Ratings, explained, "Although small and mid-sized firms have actively disposed of distressed projects, the absence of sufficient new orders has prevented qualitative improvement, resulting in a higher proportion of caution and potentially distressed assets among their remaining projects."

Some experts also argue that it is too soon to be reassured about the PF risk faced by securities firms. The credit rating industry is concerned about several factors: the prolonged downturn in the real estate market could lead to future issues such as construction delays or delinquencies, and the pace at which remaining projects are being wound down is slower than expected.

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