LH groans under weight of properties gone bad

Korean version of Fannie Mae & Freddie Mac feared

By Kim Tong-hyung

Staff reporter

The government was repeatedly found force-feeding the property bubble in past years and the Korea Land & Housing Corporation (LH) had served as its tube.

Now, with the housing market spinning wildly in a freefall, the state-run housing company is scurrying to avoid being crushed by an avalanche of debt.

LH recently unveiled that its financial troubles will force it to kill or water-down 120 of its 138 new housing projects around the country. The reevaluation process is to be completed by the end of August and most of the new projects are expected to be canned, as the company is already struggling to finance 276 other projects in progress.

Although LH’s announcement was obviously devastating news for the involved cities and a skidding real estate market that is enduring some uncomfortable market corrections, observers say the inevitable has merely become reality.

LH has been one of the county’s most debt-ridden public enterprises, laboring under a 118 trillion won (about $99.8 billion) deficit and daily interest payments that reach 10 billion won. The company’s debt is expected to approach 130 trillion won by the end of the year and exceed 171 trillion won by 2012, according to LH officials.

Despite its deteriorating financial health, LH continued to be an overworked government mule in past months as policymakers experimented with a dizzying array of measures to re-inflate a depressed housing market.

In revealing a package of measures to jolt the property market in May, the government required LH and the Korea Housing Guarantee (KHGC) to shoulder much of the 5 trillion won slated for buying vacant newly-built apartments in a desperate attempt to reduce the massive inventory of unsold homes.

This was despite the fact that LH had been stretched thin by the slew of government-initiated housing projects, such as the construction of the cheaper ``Bogumjari’’ homes and the increasing number of rental apartment complexes for low-income families. And then there was the burden of constructing Sejong City, the controversial administrative capital that is to be built near Daejeon.

LH’s declaration to shut down new activities is certainly alarming for confounded government officials, who are caught between letting the air out of the bubble and creating another one, as they seek to ease the pain from the inescapable burst.

The decision could also have long-term ramifications in housing and urban development, as it’s hard to imagine private companies being capable of picking up the projects abandoned by LH.

``We have to admit that this is indeed an existential crisis for us,’’ said an LH representative.

``Most or 140 or so new projects don’t seem to have a chance of being profitable and we have no more room left for taking on debt. The declining property market has now pushed the prices of some apartments below their construction costs, and at some point, you have to stop and control the bleeding,’’ said the official.

LH had already announced its intentions to wash its hands of a number of redevelopment projects in Seongnam, Gyeonggi Province, that were part of the city’s Pangyo New Town development project.

The company also seems ready to bail on the dozen or more housing projects it had been involved in Cheongju and other North Chungchung Province cities, its redevelopment project in Daejeon and its plans for a seaside resort town in Buan, North Jeolla Province. The Bogumjari projects in Gyeonggi Province and North Gyeongsang Province may also be shelved.

LH has yet to complete the land compensation in a project for building a massive industrial complex in Daegu, which was supposed to be completed by 2014, but now looks likely to miss that deadline.

LH was created by a merger between the Korea National Housing Corp. and the Korea Land Corp. in October last year to back the Lee Myung-bak administration’s touting of a ``small government.’’ However, it may have been born astride a grave, as the decision to combine two-debt ridden enterprises without thorough restructuring is now providing to have been an ill-advised one.

Before their merger, the Korea National Housing Corp. and Korea Land Corp. had been racing to introduce slews of new housing and urban development projects around the country, exploiting their ability to access government-owned land, which allowed them to build apartments at cheaper prices. The state-run enterprises were also involved in the excessive development plans by local governments, which had been looking to profit from the property boom.

Critics say that the government is just beginning to pay the price for ruthlessly feeding the property machine over the last decade, with companies like LH kicked in the teeth as the past increase in property wealth now proving to have been an illusion.

``LH’s decision to pull its new projects will be another serious blow to the struggling real-estate market, which is already suffering from dried out transactions as home buyers continue to anticipate prices will fall. The metropolitan area near Seoul would be most devastated by the decision,’’ said Byeon Seong-jin, an analyst from Mirrae Asset.