Value context and insight. lkm@koreatimes.co.kr
Real estate risks set to hit brokerages in 1st half of next year
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By Lee Kyung-min
Fears are mounting of poor growth for local brokerages, fueled by a combined 12 trillion won ($9.1 billion) in project financing risk exposure certain to wipe out bridge loan-tied credit before next June, according to market watchers, Wednesday. A bridge loan is a high-risk, high-interest loan operated mostly by securities firms and savings banks for the short term.
Further dimming the prospects are losses in overseas alternative investments and high-interest-rate-driven, lower-than-expected bond valuations, leading to credit downgrades in sustained unfavorable market conditions.
Also at play are real estate project financing risks amplified by inflation-sparked rises in raw input materials, and the resulting significant reduction in profitability. More builders are left struggling with delays and outright scrapping of ongoing projects, as evidenced by rising vacancies of non-residential buildings in remote regions over the past few months.
Experts say some brokerages should brace for losses of about 14 percent of their respective equity capital since most of the bridge loans will reach maturity in the first half of next year.
Grim outlook
According to a September report by Korea Ratings, project financing exposure to 23 local brokerages from the outstanding loan and debt guarantees due by June next year came to 12 trillion won, half of the total. Of that, 7.3 trillion won is bridge loans, short-term loans used to offer financing during the transitionary period.
The 12 trillion won is part of 16.7 trillion won granted by the 23 brokerages in project financing-related credit to local builders and real estate developers.
The figure of 16.7 trillion won is a decrease from the year-to-date high of 19.24 trillion won in June. The previous high was 19.6 trillion won in September last year amid the Legoland credit crunch crisis.
Korea Investors Service said a quarter of project financing loans totaling 6.1 trillion won set to mature in the second half of this year were granted to businesses that had a construction period of over 18 months. Market watchers say construction periods of over two years are not likely to turn a profit, meaning brokerages will not only fail to rearrange the short-term bridge loans into the long term but also cover for the losses.
Korea Ratings downgraded Daol Investment & Securities’ credit rating outlook to “A” (negative) from “A” (stable), Nov. 29.
It followed the downgrade of the credit ratings outlook for Hi Investment & Securities to “A plus” (stable) from “A plus” (positive) Nov. 24.
Their credit ratings will almost certainly be downgraded unless they make improvements during the monitoring period.
NICE Investors Service said the non-performing real estate project financing loans of local brokerages are believed to exceed 6 trillion won as of June, far greater than the initial projection of 1.2 trillion won. The higher figure factored in loans of extended maturity despite construction delays, as well as sales of overseas real estate project financing funds and real estate investment trusts.