"To Ensure a Soft Landing for the Real Estate PF Crisis, Support Measures for Land and Unsold Units Purchases Must Be Increased"

Over the past year and a half, the real estate PF (Project Financing) funding environment has deteriorated, coupled with rising construction costs, creating a sense of crisis throughout the construction industry. Recently, concerns have been raised that the scale of non-performing loans due to the real estate PF crisis could be larger than expected, necessitating the preparation of support measures to ensure a soft landing.

The fate of Taeyoung Construction, which applied for a workout (corporate restructuring) after failing to repay real estate project financing (PF) loans worth approximately 9 trillion won, will be decided on the 11th. The photo shows the Taeyoung Construction headquarters in Yeongdeungpo-gu. Photo by Jo Yongjun jun21@

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On the 9th, at the Construction Industry Research Institute's trend briefing, Research Fellow Kim Jeong-ju stated, "During the real estate market boom, development projects were excessively promoted, and the scale of non-performing loans in the future could be unexpectedly large, so policy efforts should be concentrated on ensuring a soft landing of the crisis."

Kim explained, "Compared to the global financial crisis, the absolute scale of PF has increased, and the PF supply structure has become more complex than before, making rapid resolution of non-performing loans difficult. It is also impossible to completely rule out the possibility of instability in the capital market during the handling of large development projects."

Recently, construction costs have risen, and financial institutions have reduced PF supply, increasing financial costs and decreasing new development projects, thereby reducing order opportunities and worsening the profitability of development projects. As financial authorities move to resolve real estate PF, the sense of crisis throughout the construction industry is intensifying. The deterioration in profitability from development projects can lead to insolvency of construction companies and spread to financial institutions that supplied PF.

Domestic real estate PF is structured to rely on the credit enhancement of construction companies for supply. Many domestic real estate PF projects involve financial institutions providing funds secured by guarantees such as completion guarantees, debt assumption, or joint guarantees provided by construction companies, even if the developer's capital strength is low. As a result, if the profitability of development projects declines, the debt repayment burden inevitably shifts to the construction companies. If construction companies become unable to repay debts due to bankruptcy or other reasons, financial institutions will inevitably incur losses.

Research Fellow Kim said, "To ensure a soft landing of the crisis, it is necessary to prepare support measures that can reduce the scale of non-performing loans for projects where normal business progress is impossible at the bridge loan stage or where completion has been achieved but loss recognition is inevitably delayed."

Taeyoung Construction, which is experiencing a liquidity crisis due to real estate project financing (PF), has applied for a workout. On the 5th, the construction site of Taeyoung Construction's Seongsu-dong development project located in Seongdong-gu, Seoul, has come to a halt. Photo by Jinhyung Kang aymsdream@

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First, by utilizing public participation funds, REITs, or land banks, it is a plan to expand the purchasing capacity for land likely to be used for rental or sale housing. LH or regional public development agencies can form funds with the private sector to purchase unsold completed units, and measures such as tax burden relief for the purchasing entities or tax credits for investors can also be explored.

For ongoing projects, measures to improve profitability to disperse the timing of loss recognition and create conditions for loss sharing through consultation among market participants can also be considered. If the profitability of development projects improves, it becomes easier for participants to resume projects, extend loan maturities, and share losses.

Research Fellow Kim said, "Measures to reduce acquisition tax or capital gains tax burdens on individuals, corporations, or businesses purchasing unsold units in local areas can also be considered to expand demand for unsold purchases," adding, "It is also necessary to provide stronger benefits to individuals or corporations conducting rental businesses by purchasing unsold units than to general registered rental business operators."

Consideration is also needed for restructuring the domestic real estate PF system, which causes financial market instability depending on real estate market fluctuations. The risk-sharing structure among development project participants should be normalized to enhance the stability of development projects.

In particular, the competitive bidding environment is cited as a main cause of excessive credit provision by construction companies. To resolve this, a reasonable regulatory framework should be established to address unfair agreements between financial institutions and construction companies during the development project process. For example, currently, exceptions to completion guarantees are recognized only in limited cases, but the Ministry of Land, Infrastructure and Transport or the Financial Services Commission could establish interpretation standards and recommend them to PF market participants.

Research Fellow Kim explained, "The Financial Services Commission should establish clear legal grounds for real estate PF, strengthen soundness regulations for financial institutions handling PF, and minimize regulatory arbitrage among industries to encourage financial institutions to supply funds based on sufficient internal project feasibility assessments."

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