[PF Restructuring] ③ Smooth Progress in PF Site Normalization?... 'Pressure VS Endurance' Still Ongoing

Since June, financial authorities have completed the evaluation results of the 1st and 2nd phases of real estate project financing (PF) sites and have been pressuring all financial sectors to accelerate restructuring. However, contrary to the financial authorities' analysis, there are criticisms that the efficiency is not high. In particular, controversy arose when it was confirmed that the savings bank sector created a PF normalization fund and 'self-sold' the non-performing loans they held.

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According to the business feasibility evaluation conducted by the Financial Supervisory Service (FSS) in August and October respectively for the 1st and 2nd phases, 11% of the total PF exposure (risk exposure) of KRW 210.4 trillion, or KRW 22.9 trillion, was classified as caution (C) or at risk of insolvency (D). Since stricter new standards were applied, the exposure at risk of deterioration increased by more than 246% compared to KRW 9.3 trillion at the end of last year.

By PF type, land-secured loans accounted for 60% of the total PF. Land-secured loans reached KRW 13.5 trillion, far exceeding the main PF of KRW 4.6 trillion and bridge loans of KRW 4.8 trillion. By financial sector, mutual finance had the largest amount at KRW 10.9 trillion, followed by savings banks at KRW 4.4 trillion, securities at KRW 3.8 trillion, specialized credit finance at KRW 2.7 trillion, insurance at KRW 0.7 trillion, and banks at KRW 0.4 trillion.

The problem lies with land-secured loans and bridge loans. PF loans at the land acquisition stage are not easy to restructure or liquidate unless land prices do not fall. Kim Seon-ju, a senior advisor (team leader) at Shinhan Bank’s Real Estate Investment Advisory Center, said, “Since the land was purchased when land prices were high, they are putting properties on the market at a level that does not incur losses, aiming to recover financial costs or initial funds. Many lands said to be on a quick sale are not actually quick sales. Such properties remain unsold and accumulate in the market,” he diagnosed.

Therefore, concerns arise that real estate PF restructuring may not proceed smoothly as the financial authorities’ evaluation suggests. An industry insider said, “To go through auctions or public sales, prices must be lowered first, so there was a widespread perception that it is better to delay as much as possible. Although there are cases where properties are put on the market due to direct or indirect pressure from the authorities, many still hope for interest rate cuts and a real estate market upturn,” he explained.

A representative from the real estate trust industry also said, “Recently, there have definitely been more cases where non-prime projects are handled by loss of benefit of term (EOD) and then liquidated or restructured as recommended by the financial authorities,” but added, “It is difficult to say that these projects are being disposed of well.”

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Although the financial authorities did not clearly disclose the background, the restructuring completion rates varied significantly by sector. According to the financial authorities’ calculation, projects that completed liquidation or restructuring procedures by the end of October accounted for 21% of all non-performing PFs, but except for Saemaeul Geumgo (29%), securities (20.7%), mutual finance (17.7%), and savings banks (16.7%) fell short of the average. In particular, the restructuring implementation rate of savings banks, which have the second-largest scale of non-performing PF after mutual finance, was relatively low.

Concerns about latent PF insolvency in mutual finance and savings banks have been continuously raised within the financial sector. Savings banks created two PF normalization funds, but it was confirmed that the savings banks that sold non-performing loans through the fund and those that purchased the loans were the same, prompting the financial authorities to conduct an emergency inspection. In the case of the 2nd real estate PF normalization fund, the savings bank sector invested KRW 511.2 billion, but KRW 408.5 billion of this was confirmed to have the same entity as both the seller and buyer of the non-performing loans.

A senior executive of a savings bank lamented, “While mutual finance is liquidating non-performing projects through specialized subsidiaries managing non-performing loans (NPLs), there are not many places in the market willing to accept non-performing projects from savings banks.” Saemaeul Geumgo Central Association has MCI Loan as a subsidiary, and Nonghyup Central Association and Credit Union Central Association have Nonghyup Asset Management and KCU NPL Loan as subsidiaries, respectively.

Kim Byung-chil, Deputy Governor of the FSS, said, “Saemaeul Geumgo has a high rate of liquidation and restructuring because many non-performing projects have been sold through Korea Asset Management Corporation (KAMCO),” and added, “Other sectors are also exploring various sales methods to actively handle non-performing assets.”

There is also a forecast that even after completing non-performing restructuring, new PF projects may not proceed smoothly as the financial authorities expect. The financial authorities expect that the completion of liquidation and restructuring procedures will result in a housing supply effect of about 150,000 units by the first half of next year.

Senior advisor Kim said, “Even the so-called ‘prime’ land along the main roads in Gangnam is not showing business feasibility,” and evaluated, “Most projects other than youth housing, Korea Land and Housing Corporation (LH) purchase rental housing, and large-scale office buildings have mostly frozen.” He added, “It is still too early to judge that PF restructuring and the subsequent new PF projects are proceeding smoothly, so we need to watch carefully.”

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