The Bank of Korea: "If Commercial Real Estate Loan Prices Fall by 20%, Financial Institutions Face 2.6 Trillion KRW Loss"

Bank of Korea's '2020 First Half Financial Stability Report'
Commercial Real Estate Secured Loans Down 20%... Financial Institutions Expected to Lose 600 Billion Won Investment

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] The Bank of Korea argued that there is a need to strengthen risk management for commercial real estate mortgage loans, which have a lower recoverable amount compared to housing mortgage loans.

On the 24th, the Bank of Korea analyzed the commercial real estate market trends in the '2020 First Half Financial Stability Report' approved at the Monetary Policy Committee meeting.

It is expected that shocks in the commercial real estate market will affect the profits and losses of financial institutions through various channels.

Considering a scenario where commercial real estate prices fall by 20% over the next year and rental income yields drop by about twice as much as during the global financial crisis, financial institutions are estimated to face an additional burden of approximately 2.6 trillion won in loan loss provisions. Due to the decline in returns on financial investment products such as real estate funds and REITs, the scale of investment losses for financial institutions is expected to reach 600 billion won.

The Bank of Korea added, "Even if there is a somewhat significant decline in commercial real estate prices and rental income, the overall asset soundness is good, so the negative impact on the financial system will not be severe."

The Bank of Korea diagnosed that the industrial real estate market is showing signs similar to the late boom or early recession phase, with prices rising for more than 40 months and transaction volumes decreasing. It also explained that there is a possibility of quickly entering a recession phase if the economic downturn deepens.

Meanwhile, due to the COVID-19 pandemic causing consumption contraction, it is analyzed that the possibility of defaults on commercial real estate mortgage loans will increase. The average price increase rate slowed significantly to 2.8% this year, and the monthly average transaction volume has been declining since 2016.