Big 5 banks brace for losses from foreign real estate projects

Balance of five major commercial lenders’ related fund products surpass W750b

View of Hong Kong’s Central district (123rf)

South Korea’s top commercial banks -- KB Kookmin, Shinhan, Hana, Woori and NongHyup -- are facing a potential risk of suffering losses in overseas real estate investments amid a slowdown in the global property market following persistent high rates.

The balance of overseas real estate funds sold by the five banks stands at 753.1 billion won ($580 million), according to financial authorities. Of the amount, fund products worth 257.1 billion won are set to expire next year.

With the global real estate market in a prolonged slump, especially in the commercial sector, concerns loom large for the fund products as property prices have yet to recover after experiencing a significant fall from when the investments were made.

If the market is unable to recover before the fund products reach maturity, investors will likely suffer losses. But unlike recent concerns about Hong Kong index-tied equity-linked securities, real estate fund products can be subject to maturity extensions, meaning the losses may not be actualized next year.

Banks are not alone in facing risks. A large number of local brokerage firms and asset managers here have invested in foreign properties in the US and Europe over the past few years.

According to the Financial Supervisory Service, the balance of local financial firms’ alternative investments in the overseas real estate market stands at 55.8 trillion won as of end-June, up 2 trillion won on-year. Of the total amount, investments worth 14.1 trillion won are set to expire next year.

Earlier this year, Korean investment firms such as Igis Asset Management and Mirae Asset Securities suffered from liabilities in their commercial real estate investments, facing difficulties in refinancing as the properties’ prices fell due to the market slump.

Out of concern for possible crises, local financial authorities are paying keen attention to related investments.

Kim So-young, vice chairman of the Financial Services Commission, the nation’s top financial regulator, requested that the FSS "closely monitor the possibility of losses (related to overseas real estate fund products) and the responses of each finance firm" at a meeting held on Dec. 11.

While overseas real estate investments are at risk, concerns are growing for a possible liquidity crunch from the domestic side as well, as figures show that the local project financing market is under distress.

According to the FSS, the total balance of real estate project financing loans in the financial sector stood at 134.3 trillion won as of end-September, up 1.2 trillion won from end-June. The delinquency rate stood at 2.42 percent, 0.24 percentage point higher than the second quarter.

The figures are relatively high when compared to the previous balance of 92.5 trillion won and a delinquency rate of 0.55 percent at the end of 2020, before the Bank of Korea began its rate hike cycle.

Though financial authorities are putting forward a stance that the current delinquency rate remains under control, the figure has yet to show a decline, and remains a possible threat for the local finance industry.

Choi Sang-mok, the nominee to become Korea's next finance minister, pinpointed the project financing market as a major risk for the Korean economy.

“The risks of the project financing market grew from entities participating in businesses with an optimistic outlook from the real estate market’s heyday, and the deterioration of profitability due to (higher) rates and construction costs,” Choi said in a statement submitted to the National Assembly for his confirmation hearing slated for Tuesday.

By Im Eun-byel(silverstar@heraldcorp.com)