Choi Sang-mok "PF Structure Improvement Research Service"... Will It Change to the American Style?

Choi Sang-mok, Deputy Prime Minister for Economy and Minister of Strategy and Finance, pointed out the blind spots of the current real estate project financing (PF) system and announced plans to undertake fundamental structural reforms. Unlike advanced countries such as the United States, where land acquisition is resolved with equity capital, the structural problem of domestic PF has been criticized for relying on loans to purchase land, drawing attention to whether there will be a groundbreaking change in this area.

On the 21st, Deputy Prime Minister Choi appeared on 'KBS Sunday Diagnosis Live' and said, "In advanced countries, PF basically involves buying land with equity capital and then raising finance when constructing buildings or conducting projects. However, in Korea, assuming the total cost is 100, only about 5% is covered by equity, and the remaining 95% is financed through loans starting from the land purchase," highlighting the blind spots of the Korean-style PF.

He added, "As a result, if the sale price plummets, it causes a chain reaction. Under the current structure, such crisis situations are bound to repeat. We will simultaneously make efforts to fundamentally improve the PF system through research projects," he said.

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Accordingly, there is growing interest in whether the government will push for a shift to an 'advanced country-style PF system' in the future. A major issue pointed out with domestic PF compared to advanced countries like the U.S. is the lack of initial capital from developers, leading to reliance on loans. The Korea Institute of Finance (KIF) explained in its 'Financial Brief' published in June last year that domestically, developers contribute about 10% of the total project funds and procure 70-90% of the land acquisition amount through bridge loans from financial institutions. In contrast, in the U.S., developers form a limited liability company (LLC) and raise initial capital of about 20-30% of the total project cost, with the LLC receiving additional investments to fully repay loans and release land collateral before financing only the construction costs through financial institutions. This aligns with Deputy Prime Minister Choi's remarks.

Another difference between advanced countries and domestic PF is whether project costs are covered by the funds of pre-sale buyers. In Korea, large-scale residential real estate developments typically involve pre-sales shortly after groundbreaking, and a significant portion of the buyers' deposits and interim payment loans are used as project funds. In contrast, countries such as the U.S., Canada, the U.K., and Australia have pre-sale real estate development methods, but do not use buyers' funds as project costs.

To shift to a U.S.-style PF system, KIF points out that developers need to increase their initial capital and prevent buyers' funds from being used as project costs. Lee Bomi, a KIF research fellow, stated, "To improve Korea's real estate PF structure, it is necessary first to strengthen developers' capital requirements and encourage various forms of partnership structures through incentives to expand initial capital for real estate development," adding, "The pre-sale ratio should be reduced or the proportion of interim payments decreased during real estate development."

However, there are opinions that converting solely to an advanced country-style PF system is not necessarily the answer. Kim Jeong-ju, a research fellow at the Korea Institute of Construction Industry, said, "Just because the U.S. or other advanced countries do it this way does not mean adopting it will solve our problems. PF is a business model with high risks, especially for short-term projects like pre-sale businesses, so it is necessary to activate alternative financing methods such as real estate investment trusts (REITs) and shift toward long-term operation," he diagnosed.

He also argued for the need to ease real estate regulations. Research fellow Kim said, "Projects that could have proceeded normally were delayed due to the price ceiling system and loan regulations under the previous administration, and problems arose during the interest rate hike period," adding, "The government should not implement policies that excessively suppress both demand and supply simultaneously during periods of rapid real estate price increases."

This is not the first time the government has called for improvements to the PF system. President Yoon Suk-yeol stated at a livelihood discussion on the 10th, "The problem with construction PF insolvency is whether the interest burden can be endured," and added, "Central and local governments should quickly decide that if a PF project seems unfeasible, permits should not be granted, and if it must proceed, it should be allowed to do so swiftly."

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