Real Estate Developers Enter Industrial Infrastructure... Considering a 100 Billion Won Mezzanine Fund Plan

The real estate development industry is considering the creation of its own mezzanine fund, worth around 100 billion won, combining equities and bonds. Amid soaring construction costs and a tightened project financing (PF) market, this move signals the industry’s intention to provide seed capital for new infrastructure businesses such as data centers and renewable energy projects, where securing real estate funding has become increasingly challenging. The real estate sector appears to be aligning itself with the current administration’s policy of “productive finance.”

According to industry sources on May 6, the Korea Developers Association has recently been discussing the formation of a fund in the form of a private equity fund (PEF), with its member companies at the core. This idea was also shared at the association’s executive workshop held at the end of last month, as one of the financial support measures to ease the initial funding difficulties of development projects. Before the main PF or institutional capital is deployed, permits and land acquisition are required-thus, the fund aims to supply initial capital at this stage. The plan is to select solid projects that have commercial viability but face a funding gap before senior financing is arranged, and to provide them with bridge financing to the next stage.

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The move by developers to create a mezzanine fund is seen as an effort to overcome the real estate downturn on their own. Since the Legoland incident in 2022, the credit crunch has persisted, with the PF loan delinquency rate in the financial sector reaching 3.88% at the end of last year. This is nearly a sixfold increase from 0.66% at the end of June 2022. In particular, the delinquency rate for land-backed loans, used for initial land purchases, is approaching 30%. As secondary financial institutions, wary of potential defaults, have effectively halted new lending, even projects with recognized commercial viability are often unable to form lender groups and have come to a standstill. Moreover, development demand exists only in the Seoul metropolitan area, making it difficult to find projects in regional areas. Industry voices are warning that real estate development is truly in crisis.

This initiative also reflects the commitment of Hanmo Kim, who became president of the Developers Association in February. President Kim has previously stated his intention to complete the establishment of a mutual aid association during his term to support member companies facing internal and external crises and to build an independent financial ecosystem. The initiative is also meant to open the way for the real estate industry to participate in the government’s “productive finance” agenda.

The proposed fund size is about 10 billion won in initial capital, to be matched 1:1 with external financial sector funds, bringing the total to approximately 100 billion won. There are also plans to use this 100 billion won as seed money to eventually establish a mutual aid association with assets in the 1 trillion won range over the long term.

The scope of investment is expected to expand in stages. In the short term, the fund will acquire equity stakes in high-quality projects facing funding shortages and operate them as rental properties or use purchase agreements with Korea Land & Housing Corporation (LH), focusing on safer assets with relatively easy liquidity to build a foundation. In the mid- to long-term, the plan is to broaden investments beyond housing development into infrastructure fields with high national demand, such as data centers, solar power, and offshore wind power.

The target annual return is around 8%. Given the development project risks currently perceived by the financial sector, subordinated investors typically demand a minimum return of 15-20%. An industry insider commented, “This is less about profit-making and more about creating a mutually supportive financial ecosystem for the industry.”

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The key issue is the implementation method. As a non-profit incorporated association, the Korea Developers Association faces legal and procedural restrictions on directly creating and operating a profit-oriented fund. Therefore, the association is considering taking on the role of a platform that provides industry networks and credibility, while the actual operation of the fund would be led by member companies using private equity funds or asset management companies (AMCs). The association plans to refine the details after gathering internal opinions and conducting legal reviews.

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