Korea’s real estate project financing poses risks to financial industry

[Image source: Gettyimagesbank]

Insolvencies of real estate project finances are expected to hit South Korea’s financial industry this year as the local property market remains in the doldrums.

According to the data reported by the Financial Supervisory Service to the National Assembly’s National Policy Committee on Thursday, the balance of real estate project financing loans in the domestic financial sector at the end of September last year was 125.3 trillion won ($99.1 billion), up 15.1 trillion won from the end of 2021 and a surge of 35 trillion won from the end of 2020.

The balance was the largest for insurance companies at 44.1 trillion won, followed by banks, specialized credit financial companies, savings banks, mutual finance and securities.

Loan delinquencies are also surging. The delinquency rate for securities companies was 8.2 percent at the end of September last year, up 4.5 percentage points from the end of 2021. This is more than six times higher than that of late 2019 at 1.3 percent.

The delinquency rate at savings banks stood at 2.37 percent, up 1.18 percentage points from the end of 2021, while that of credit companies rose 0.6 percentage point to 1.07 percent. The default rate of insurance companies rose 0.33 percentage point to 0.40 percent.

The delinquency rate of the entire financial sector, including banks, rose by 0.52 percentage point to 0.90 percent from 0.38 percent over the same period.

Financial Supervisory Service [Photo by Lee Seung-hwan]

“Delinquencies in real estate project finance loans, which had fallen until the end of 2021, turned to an upward trend last year,” FSS said. “Concerns are growing over the insolvency risk of project financing in real estate on rising interest rates and raw material prices.”

Still, the financial watchdog said that this trend of increasing delinquencies in the real estate project finance sector shouldn’t be taken so seriously yet.

“PF loans of securities firms are small, and just one or two businesses defaulting on loans will drive up the delinquency rate,” said an unnamed official at the FSS. “We are carefully watching the trend, but it doesn’t seem to require much attention yet.”

Financial authorities underscore preemptive measures to prevent the instability of real estate project finance from impacting the financial market.

The FSS plans to examine PF risks under integrated management of all businesses, which had been managed by different organizations according to the business type. Frameworks will be also reinforced to analyze different types and progress of development projects such as housing, logistics and commercial facilities.

The financial authority also plans to revise the PF lender agreement and launch a lender council involving around 200 financial companies in the first quarter of this year. The council, which is modeled after the one created in 2008 during the global financial crisis, is aimed at encouraging voluntary insolvency of defaulting PF businesses.