Big property projects being folded

The 31 trillion won (about $27 billion) project to build a massive high-tech information and finance hub near Yongsan station in downtown Seoul appears close to being derailed, with investors now skeptical of whether the returns will ever justify the huge investment required. / Korea Times

By Kim Tong-hyung

Seoul, the urban equivalent of an insecure teenager, had vowed to splurge on putting up a cluster of skyscrapers to rival the boom towns of Shanghai and Dubai. With the country’s market now stumbling toward a terrifying fall, the dreams of strutting through valleys of super-high buildings appears set for a rude awakening.

The country’s real estate sector has been decaying quickly over the past year, highlighted by collapsing house prices, dearth of transactions, and the spectacular financial troubles of state-run housing company, Korea Land and Housing (LH).

And the turmoil is felt in the office market as well, evidenced by the slew of deaths predicted for mega-construction projects involving project financing, which were supposed to change the face of Seoul and provincial cities, but may leave them with permanent scars instead.

All hands seem ready to bail on the ``Yongsan International Business Zone,’’ a 31 trillion won ($27 billion) project involving a 150-story trophy skyscraper, a wealth of riverfront business and tourist venues, and a state-of-the-art dock, which was to be the country’s largest single property scheme ever.

The international business hub had been touted by municipal authorities as the heart of Seoul’s new urban landscape. But with disillusioned investors and builders now struggling to agree on how to cut the 8 trillion won check for land purchase among them, the project seems close to being canned.

The 2.4 trillion won plan to build a massive distribution facility in Yangjae-dong, southern Seoul, is also in jeopardy, after creditors, including the UBS Hana Asset Management and Woori Bank, filed for the project financing scheme’s bankruptcy on Monday. The trouble was predicted for the two builders inked for the project, Sungwoo Construction and Daewooo Motor Sales, recently fell under court-initiated restructuring processes.

Seoul’s satellites cities are also struggling to continue their major construction projects, with the project financing structures in each project crumbling as builders are becoming increasingly reluctant to take on more loans. The list of the projects in crisis include Seongnam’s ``Alpha Dome City,’’ which was to be the commercial heart of its Pangyo New Town and Goyang’s expansion plans for its ``Hallyu World International Business Center.’’ Incheon is also struggling to finance its redevelopment project for the Dohwa district and its wish to erect its own trophy skyscraper, dubbed ``Incheon Tower,’’ in the Songdo district.

According to the Construction Association of Korea (CAK), there are about 50 major construction plans involving project financing that are being pursued around the country, which combine for 120 trillion won.

Ten of the projects had either been halted or killed, the CAK said, and most of the remaining projects are struggling to secure financial injections as well.

``Construction companies have traditionally been securing project financing loans by taking on guaranteed loans. These companies are now reluctant to take too much of a risk in a market that could very much kill them,’’ said a CAK spokesman.
``Both financial and construction investors are looking to avoid project financing construction plans, and we could see them falling to a fate similar to what happened in Yangjae-dong.’’

Project financing refers to a common method for financing large-scale construction schemes, in which the lender looks to the revenues expected to be generated by the project for the repayment of the loan.

Biblical disasters

It was between 2006 and 2007 when the financial companies and builders became involved in the aforementioned mega development projects, and during that time, the country’s property market was enjoying the height of its bubble-inflated power.

The sector has skidded sharply since then, reminding everyone that the increase in wealth during the previous years was largely an illusion, and the companies are suddenly concerned that they will never see justifiable returns for their massive investments.

The derailing of the Yongsan international business hub is particularly telling. Aside of KORAIL, the state-run rail operator that owns the land near Yongsan station up for development, and the Seoul Metropolitan Government, the project involves a who’s who list of the biggest players in Korea Inc.

Woori Bank, Samsung Life, Prudential and KB Asset Management are included among the financial investors, while Samsung C&T, GS Engineering and Construction, Hyundai Development Company and the construction arm of POSCO are participating as builders.

And aside of them, companies like KT&G, CJ, Mirae Asset and Samsung SDS are involved as ``strategic’’ investors.

If this group of major conglomerates can’t find a way to rescue the project, perhaps nobody can, and there is a real chance that they will eventually decide to wash their hands of it.

Even should the 150 story office tower and other facilities ever be built, the revenue from sales and rent of office space aren’t likely to come close to making up for the companies’ massive investment, including the 8 trillion won for land purchase, according to observers.

The Yongsan skyscraper is just one of the seven super-tall buildings _ designed to have 100 floors or more _ that are being pursued in different Seoul districts, including the ``Seoul Light’’ tower in Sangam-dong and the ``No.2 Lotte World’’ in Jamsil. Although it’s hard to imagine all of these projects coming to light, oversupply is certainly a concern when the vacancy rates in Seoul’s office sector are already significantly high.

According to official data, Seoul will have 43 additional mega-buildings, measuring 33,000 square meters or larger in combined floor space, by 2013. The city was provided with 1.67 million square meters in new office space in 2007 and 1.01 million square meters in 2008, both more than doubling the average of around 500,000 square meters between 2000 and 2006, which indicates that the prices for rents and units sales will continue to drop.