[Real Estate PF Crisis] Authorities Say "Stable Level" Amid April Crisis Rumors... Market Calls It a "Visual Illusion"

Following the major political event of the 22nd National Assembly elections, authorities have stepped in to quell concerns about a so-called 'April crisis,' which suggests that real estate project financing (PF) defaults could begin to surface in earnest. This is because the maturities of PF loans are diversified, and the delinquency rate remains stable compared to historic highs.

However, some voices point out that the relatively low delinquency rate may be a 'mirage effect' caused by past extensions of maturities for troubled PF projects. Regarding the authorities' plan to promote a soft landing for the PF market through project-by-project evaluation, there are concerns that "it will be difficult to achieve meaningful results until the real estate market recovers."

The financial authorities assessed that the overall situation remains stable, citing that the PF loan delinquency rate across the entire financial sector rose by only 0.28 percentage points to 2.70% at the end of last year compared to the previous quarter. Key indicators related to real estate PF, such as delinquency rates and unsold housing units, remain at very stable levels compared to the historic highs seen during the 2008-2009 global financial crisis.

The real estate PF loan delinquency rate at the end of last year (2.70%) shows a gap of 10.92 percentage points compared to the historic high recorded at the end of 2012 (13.62%). Securities companies (13.73%) and savings banks (6.94%), which have raised concerns due to high delinquency rates, also experienced historic highs of 62.00% and 36.58% at the end of 2013 and 2015, respectively. Unsold housing units also show a difference, with 166,000 units at the historic peak in late 2009 compared to 62,000 units at the end of last year.

Authorities believe that the financial sector has sufficient resilience to withstand these delinquency rates. Kim Byung-chil, Deputy Director of Strategic Supervision at the Financial Supervisory Service, explained in a briefing, "We have been ordering strengthened provisions for PF loans, and the provision coverage ratio against non-performing loans has risen to about 109%. Savings banks, which have higher delinquency rates, have a coverage ratio approaching 150%, so a gradual increase in delinquency rates is a level our financial system can comfortably absorb."

Regarding the 'April crisis' theory that bad debts deferred so far could surface after the general election, Kim dismissed it, saying, "Looking at the maturity status of PF loans in the financial sector, maturities are not concentrated at a specific point in the year but are evenly distributed, so we do not expect problems to arise concentrated in any particular month," adding, "There is no management of the PF market or deferral of defaults based on any political schedule."

Despite concerns that cases like Taeyoung Construction, which is undergoing a workout (corporate restructuring) process, could reappear, he said, "Currently, there are no construction companies showing signs of concern," and added, "We are closely monitoring their funding and interest rate trends and will respond promptly if necessary."

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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Accordingly, the authorities plan to begin a full-scale project-by-project evaluation to ensure a soft landing for the real estate PF market. Since the PF normalization fund introduced last year has not achieved significant results, and the PF creditor consortium agreement has limitations in reaching consensus for project normalization, the authorities intend to promote normalization for viable projects and activate restructuring or auction sales for projects lacking viability through related institutional improvements.

Kim explained, "The reason why auction sales have not been noticeably activated in the market is that developers or creditors often price properties higher than the market expects," adding, "We plan to create an environment that increases incentives for auction sales by reflecting expected losses related to PF in the books, and if auction sales still do not activate, we will take measures such as reclassifying project viability through project evaluations."

However, concerns remain, especially among the financial and construction sectors, that latent risks could surface after the general election. Although the current delinquency rate is indeed lower compared to the global financial crisis and subsequent periods, repeated maturity extensions through various soft landing measures have created a mirage effect.

One basis for this is the estimation that there are still many unrecognized defaults due to a series of soft landing measures, including PF creditor consortium agreements, since last year. For example, industry insiders say that although developers are pushed to the brink, many cases extend loans by deferring interest payments and extending maturities, thereby postponing the crisis. A financial sector official noted, "The April crisis theory does not mean a large-scale bankruptcy immediately after the general election, but that previously deferred defaults will gradually emerge as full-scale restructuring begins."

There are also doubts about the interpretation that current indicators are stable compared to historic highs. The recent interest rate hikes, global inflation, and strengthened domestic labor and safety regulations have driven up construction costs, which is a problem. A senior official at a financial company said, "It is true that the absolute PF loan delinquency rate is lower than in 2013-2015, but we must also consider that market conditions have changed significantly," adding, "At that time, interest rates were low, demand existed, and construction costs were around 5 million KRW per square meter, but now interest rates are high, demand has decreased, and construction costs have risen so much that even reconstruction associations in Seoul are giving up projects. A flat comparison is difficult."

For these reasons, there are concerns that the restructuring process, including auction sales of non-viable projects, may not proceed swiftly. For example, many troubled projects stuck at the bridge loan stage are located in provincial areas, making it difficult to secure viability considering the huge construction costs, and even if auction sales proceed, both parties may find it hard to agree on reasonable prices. Projects that have entered the main PF phase are also not free from issues related to increased project costs and a frozen real estate market.

Consequently, some analyses suggest that small and medium-sized securities firms and specialized finance companies could face difficulties. While many financial institutions, including banks, can absorb shocks based on their accumulated resilience, securities firms and specialized finance companies without parent companies or whose parent companies lack sufficient strength may be pushed into crisis. Professor Kim Sang-bong of Hansung University’s Department of Economics said, "There are quite a few PF loans maturing this year, and although the current level of loan loss provisions is sufficient, the situation is not one to be complacent about," adding, "It is not impossible that some financial companies will suffer damage."

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