Strategic meetings begin with financial institutions to address real estate PF challenges
Construction of a new building is underway in Seoul, in this April 2023 photo. Yonhap
Financial authorities have initiated discussions with various financial entities to restructure real estate project financing (PF), according to sources Tuesday.
Starting this week, the Financial Supervisory Services (FSS) commenced engagements with various financial businesses in the banking industry — including five major commercial banks — the insurance industry and the second-tier financial sector.
The FSS convened a closed-door meeting Tuesday with nine securities firms.
These discussions aim to assess the PF project sites' current state and stimulate auctions and public sales. The series of meetings is scheduled across a two-week period.
The FSS has recently launched an assessment process for PF sites to facilitate normalization in the sector. It has also mandated financial firms to make full provision for expected losses on non-viable PF projects at the time of financial settlement and to hasten the sale by using auctions and public sales.
This move comes in response to the increasing number of PF projects facing significant declines in viability due to high interest rates and escalating construction costs.
Refinement of evaluation criteria for PF sites is also underway. Currently, projects are classified into three categories: good, average and at risk of deterioration. The plan is to introduce a more nuanced four-tier system, which will include the current categories and add a fourth, questionable recovery.
Despite these directives, it has been observed that some projects are reluctant to these measures, holding out for an improvement in business conditions following anticipated rate cuts.
However, industry insiders are concerned that in the push for auctions and public sales, even projects with high viability risk being undervalued and sold below their fair market price, which could exacerbate the financial burden on secondary financial institutions.
In a strategic response, the FSS has also begun confidential discussions with staff from commercial banks this week. This move is seen as an initiative to encourage these banks to acquire PF sites in the secondary financial sector.
If commercial banks step in to address the challenges, it would represent the first intervention of its kind in 13 years.
The FSS is set to unveil a normalization plan for the PF sector within this month, with the intention to start implementing the process as early as next month.
As of last December, the loan balance of financial industry for real estate PF saw an increase of 1.4 trillion won ($1.03 billion) since the previous September, reaching a total of 135.6 trillion won. During this period, the overall delinquency rate edged up from 2.42 percent to 2.7 percent. Notably, savings banks experienced the most significant rise in delinquency rates, with an increase of 1.38 percentage points.