FSS Collects Post-Management Plans for Real Estate PF... On-Site Inspections for Poorly Evaluated PF

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The Financial Supervisory Service (FSS) will conduct on-site inspections targeting projects with inadequate evaluation results after going through an adequacy assessment procedure for post-management plans related to the restructuring of real estate project financing (PF). Once the evaluation grades for each project are finalized by the end of this month, full-scale liquidation procedures for distressed projects are expected to begin from August.

According to the financial sector on the 9th, the FSS plans to compile the real estate PF evaluation results submitted by financial institutions such as banks and savings banks after their own assessments this week, and review the adequacy of these evaluation results. If the adequacy assessment is deemed insufficient, the FSS intends to conduct on-site inspections of the relevant financial institutions and projects.

An FSS official stated, "We are compiling the real estate PF project evaluation results submitted by each financial institution," adding, "After some adjustments, additional measures based on the project-specific plans submitted by the financial institutions will be implemented starting next month."

The fate of each project will be determined based on the final evaluation grade following the FSS’s comprehensive investigation, which is based on the evaluations submitted by financial institutions. The grades are subdivided into four levels: 'Good - Normal - Caution - Distress Concern.' Projects rated as Good or Normal will proceed normally, while those rated as Caution or Distress Concern will undergo procedures such as restructuring, voluntary sale, write-off, or promotion of auction and public sale.

The FSS’s adequacy assessment is conducted based on internally accumulated data. In preparing the real estate PF measures last May, the FSS established a basic framework to review the adequacy of financial institutions’ self-assessment results using project-specific data collected. The financial authorities classify projects that have extended maturity four or more times or experienced three or more failed auctions or public sales, regardless of whether they are main PF or bridge loan PF, as 'Distress Concern' grade by default, requiring explanations for exceptional circumstances.

The FSS plans to promptly notify the relevant financial institutions of the results of their project-specific evaluations and post-management plan inspections. However, if the post-management plan is deemed inadequate, the FSS will immediately conduct on-site inspections to finalize the grade. The financial institutions must then submit restructuring plans based on the finalized grades by next month.

Meanwhile, the financial authorities plan to reflect provisions for distressed projects in the second-quarter results according to the post-management plans finalized after FSS review. Among approximately 5,000 real estate PF projects worth 230 trillion won, the financial authorities estimate that the proportion of projects rated as Caution and Distress Concern is between 5% and 10%.

Kim Su-jin, a research fellow at Woori Financial Management Research Institute, pointed out that sectors with a high likelihood of voluntary sale and auction include local and non-residential bridge loans, Saemaeul Geumgo-managed land trust loans, and some main PFs maturing this year. She emphasized, "The decline in business viability of bridge loans triggered by global inflation is difficult to resolve even if the real estate market recovers in the future, so it is appropriate to evaluate business performance and bond value as conservatively as possible."

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