Targeting Poor PF... Actively Encouraging Site Light Auctions and Restructuring

Financial supervisory authorities are set to intensify the cleanup of non-performing real estate project financing (PF), which is considered a trigger for this year's Korean economy. For projects with reduced viability due to repeated grace periods and maturity extensions, expected losses must be fully recognized at the year-end closing, while the project evaluation method will be strengthened to induce auctions or restructuring.

Lee Bok-hyun, Governor of the Financial Supervisory Service, is holding a press conference at the Financial Supervisory Service in Yeouido, Seoul, on the 4th. Photo by Kang Jin-hyung aymsdream@

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On the 5th, the Financial Supervisory Service (FSS) disclosed the "Real Estate PF Cleanup Roadmap" during the 2024 annual business plan press briefing chaired by Director Lee Bok-hyun. This move aims to actively address the so-called "financial circulation blockage" phenomenon, where funds are tied up in non-performing PF projects, impairing the financial intermediation function.

First, the FSS mandated that projects with significantly lowered viability due to repeated grace periods and maturity extensions must recognize 100% of expected losses at the year-end closing. Regarding this, the FSS has completed one-on-one meetings with individual savings banks and plans to receive additional reserve fund accumulation plans by the 8th for inspection.

The FSS stated, "We will conduct closing inspections on the status of reserve fund accumulation and strictly guide institutions to prevent outflows through dividends or performance bonuses when they have the capacity to set aside reserves."

To prevent delays in loss recognition caused by indiscriminate maturity extensions and grace periods, the FSS will also push for amendments to creditor consortium agreements. For projects already severely impaired, sufficient loss reflection will be ensured to create conditions for auctions and other measures to commence.

Additionally, to facilitate the cleanup of projects with viability concerns, the project evaluation criteria will be revised to encourage stricter assessments. The FSS is currently operating a "Project Viability Evaluation Improvement Task Force (TF)" that includes external experts and plans to promptly finalize detailed revision plans for evaluation indicators.

Accordingly, the FSS intends to reclassify projects in the second quarter based on the revised evaluation criteria and, in the second half of the year, receive and monitor the implementation status of cleanup plans such as auctions or restructuring for each project.

Measures to support the cleanup of non-performing projects through auctions will also be established. A consultative body comprising financial companies, construction industry representatives, and trust companies will be formed to promote institutional improvements addressing obstacles to auctions. Additionally, plans to create additional financial sector funds to smoothly absorb auctioned properties entering the market will be considered.

The authorities expect that cleaning up non-performing PF projects will also contribute to stabilizing housing prices and securing public housing stability. For example, swiftly restructuring PF projects at the bridge loan stage could reduce various costs, potentially lowering real estate sale prices.

According to the authorities, recent construction costs have risen by about 24%, and financial costs by about 60%, causing apartment sale prices in the metropolitan area to increase from 6.42 million KRW per square meter at the end of 2022 to 7.38 million KRW at the end of 2023. If the existing sale price is 100, without restructuring, the price would need to be 114, leading to project delays due to concerns over unsold units.

However, if such projects are sold at a bid rate of 60%, financial costs can be significantly reduced, allowing sales at about 98, approximately 14% lower than without restructuring. This estimate considers that auction bid rates for PF bridge loan projects in the second half of this year are expected to range between 50% and 70%.

The authorities anticipate that these measures will enable the cleanup of non-performing projects to be largely completed within the year. Director Lee stated, "Since the Legoland incident in 2022, it has been difficult to actively pursue cleanup due to internal and external conditions, but now, through policy preparations, the foundational strength for cleanup is in place. We expect that the cleanup of non-performing projects and restructuring of projects at risk of impairment can be substantially completed within this year."

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