Yongsan project bankrupt

$29 bil. development venture hit by broken partnerships

By Na Jeong-ju

A company involved in a $29 billion urban development project in Yongsan, Seoul, defaulted on a 5.9 billion won ($5.3 million) interest payment, Wednesday.

The Dream Hub PFV — a special purpose company the state rail firm KORAIL and 29 private investors set up to implement the largest-ever project of its kind — is expected to file for bankruptcy soon.

The firms raised capital of 1 trillion won in 2007, but this has dried up. They have also issued asset-backed commercial papers (ABCPs) worth some 2.7 trillion won so far. A bankruptcy means they will incur a net loss of 3.7 trillion won ($3.37 billion).

The default came after KORAIL, the largest shareholder, and private firms failed to reach an agreement on how to finance the project, valued at 31 trillion won ($29 billion), amid the uncertain outlook for the property market.

Dream Hub said it couldn’t make an interest payment of some 5.9 billion won on the ABCPs by the 9 a.m. deadline. KORAIL initially planned to pay the interest after receiving a payment guarantee from the state-run Daehan Real Estate Investment Trust. However, negotiations failed, a KORAIL official said.

The Ministry of Land, Transport and Maritime Affairs convened an emergency meeting later in the day to discuss measures to minimize the damage of the default on KORAIL and the property market.

“The court will inspect Dream Hub’s financial status over the following weeks and may decide on whether to declare bankruptcy as early as next month,” a ministry spokesman said.

“It seems that the only way to keep the project afloat is to inject taxpayers’ money. But that’s not an option because investing in the project is too risky.”

The project’s stakeholders include the National Pension Service (NPS), which invested some 270 billion won; Prudential Real Estate Investment with 77 billion won; Mirae Asset Financial Group, 49 billion won; Samsung Life Insurance, 30 billion won; and Woori Bank, 20 billion won.

The project’s failure will also deal a heavy blow to KORAIL, which is already reeling from heavy debt. Analysts didn’t rule out the possibility that the firm may suffer capital erosion. In that case, taxpayers’ money will inevitably be spent to rescue the rail firm.

Damage for residents in the area could be much larger.

They are expected to take legal action to get compensation. More than 2,300 households in Seobuichon-dong in Seoul have been banned from selling or renovating their properties since the development scheme started in 2007 with big fanfare.

Home and land prices around Yongsan Station have more than doubled in the past six years. If the bubble bursts, the impact will be huge not only on the property market, but also on people’s lives.

Under the development plan, investors sought to transform about 560,000 square meters in Yongsan into an international business district that would feature a 111-story landmark building named Triple One and a wealth of riverfront business and tourist venues.

When investors committed to the project, the country’s housing market was at its peak. Developers said at the time that the business hub would attract 140 million people every year, create up to 360,000 new jobs and generate 67 trillion won in product value.

As the financial problems deepened, the shareholders attempt to draw financial support from the government. The government, however, rejected their request, saying it wouldn’t intervene in a private project.