"Capital Companies Shaken by Surge in Local Unsold Housing... Authorities Must Raise Industry Oversight Level"

Real Estate Financial Exposure of 2.5 Trillion Won Concentrated Only in Daegu, Where a Quarter of Nationwide Unsold Housing Units Are Located

[Image source=Yonhap News]

[Asia Economy Reporter Yu Je-hoon] As unsold housing gradually increases starting from local metropolitan cities, concerns about the soundness of capital companies' real estate finance are rising, and financial authorities have pointed out the need to raise the management level of the capital industry.

According to the financial sector on the 8th, Korea Credit Rating recently published a report titled "Capital: Invisible Risks - Checking Bridge Loans and Vulnerable Area Exposure," stating, "Currently, the only regulation on capital companies is the PF (Project Financing) limit, but the already invested bridge loans remain an invisible risk."

According to a survey conducted by Korea Credit Rating on 12 AA-rated capital companies and 13 rated A or below, the average real estate finance ratio by rating as of the first quarter was 21.3% for AA-rated, 34.1% for A-rated, and 59.1% for BBB-rated companies. The lower the credit rating, the higher the proportion of real estate finance.

Financial authorities recommend maintaining the real estate PF loan limit within 30% of credit assets through the Specialized Credit Finance Business Supervision Regulations, but the significant differences by credit rating are due to the varying proportions of real estate-secured loans within loan receivables. The proportion of real estate-secured loans in operating assets is 8.9% for AA grade, 14.6% for A grade, and 40.8% for BBB grade, showing a considerable gap.

A significant portion of these real estate-secured loans consists of bridge loans. Bridge loans serve as a "bridge" to PF loans, supplying funds for land acquisition before entering the main PF. While they have the advantage of higher profitability compared to real estate PF, which is secured by cash or assets such as rental income generated from the project promoted by the developer, they also carry high risks depending on whether the project proceeds.

According to Korea Credit Rating's survey, excluding unidentified companies, out of 15.7 trillion KRW in real estate-secured loans, bridge loans amount to 6.5 trillion KRW, about 41%. Excluding Shinhan and IBK Capital, which focus on corporate finance, the proportion rises to 70%. Especially, BBB-rated capital companies have a bridge loan ratio of 17% relative to underlying assets, A-rated 9%, which is significantly higher than AA-rated (2%).

The problem is that unsold housing cases are rapidly increasing in certain regions, raising the possibility of deterioration. Daegu is a representative case. As of May, Daegu had 6,816 unsold houses, accounting for 24.9% of the nation's unsold housing. The initial sales rate in the first quarter was 52.1%, significantly lower than the national average of 87.7%.

The real estate finance exposure of the surveyed capital companies in Daegu is estimated at about 2.5 trillion KRW (1.9 trillion KRW in real estate PF and 600 billion KRW in secured loans). For AA-rated capital companies, most of the 1.4 trillion KRW held consists of real estate PF, which is within manageable limits. However, for A-rated and below, the proportion of real estate-secured loans is large, and the ratio relative to capital is 20% (A grade) and 18% (BBB grade), indicating a high level of risk. For A grade and below, the proportion of loans maturing this year is also around 40-50%.

Despite this situation, Korea Credit Rating explains that regulations on the capital industry remain limited to the real estate PF regulation, which caps loans within 30% of credit assets under the Specialized Credit Finance Business Supervision Regulations. Bridge loans with high loan-to-value (LTV) ratios have been included in the PF limit and entered the management stage from this year, but there are no specific measures for bridge loans handled until last year.

Korea Credit Rating stated, "Since capital companies face no penalties for incorporating high-risk assets, the overall management level of the industry should be raised through risk weighting, limit setting, and other measures. For bridge loans, there is almost no separate soundness classification until the loss of benefit of term occurs, so there is a risk that non-performing assets could suddenly increase significantly. Therefore, it is necessary to reorganize the ineffective watch classification."