[Donmaekgyeonghwa] Even Prime Projects Face PF Loan Restrictions Amid Calls to Manage Real Estate PF

Apartment complexes in Seoul city [Image source=Yonhap News]

[Asia Economy Reporter Changhwan Lee] The tightening of funds in the real estate project financing (PF) market is also analyzed to be influenced by loan regulations imposed by financial authorities due to concerns over insolvency in the secondary financial sector.

The Financial Services Commission regulated loans by setting debt guarantee limits for securities companies and specialized credit finance companies (specialized credit finance firms) in September 2020, as the scale of real estate PF loans rapidly increased. Securities companies were allowed to handle real estate PF loans only within 100% of their own capital, and specialized credit finance firms, which were previously only subject to limits on real estate PF loans, were restricted to handling loans within 30% of their credit assets, including debt guarantees.

Financial authorities are very sensitive about real estate PF loans. Since the savings bank insolvency crisis from 2011 to 2013 was triggered by real estate PF loans, monitoring has been strengthened. The Financial Supervisory Service currently requires all financial companies to report their real estate PF loan holdings on a monthly basis. Financial companies must report in detail by project site, including the PF project name, loan size, interest rate and maturity, credit enhancement status, project progress rate, pre-sale rate, and which financial companies participated in bridge loans.

At the 'Financial Situation Review Meeting' on the 14th, Financial Supervisory Service Governor Bokhyun Lee urged, "Please continue proactive risk management efforts to prevent concerns about the soundness of financial companies related to real estate PF from expanding," and ordered, "By solidifying business feasibility evaluations, encourage smooth funding supply to sound PF projects."

Although business feasibility evaluations and funding supply to sound PF projects were mentioned, the atmosphere felt by financial companies on the ground is different. A financial company official said, "What the Financial Supervisory Service says from above and what the practitioners we actually deal with say are different," adding, "They talk about proactive risk management, but the atmosphere is almost like we should not do it."

Of course, there are cases where financial companies themselves avoid real estate PF loans due to increased risks from the real estate market downturn, rapid interest rate hikes, and worsening profitability and business feasibility, but the influence of financial authorities is significant.

In fact, as total volume regulations on real estate PF loans have been implemented, even projects with business feasibility have faced loan blockages, and some projects have been unable to transition from bridge loans to main PF loans. This is reported to be especially severe in local construction sites. Apartment projects in Daegu, Gyeongbuk, Daejeon, and Sejong are reportedly facing a crisis of being stranded as they cannot move from bridge loans to main PF loans due to loan issues.

Jung Joongho, Director of Hana Financial Management Research Institute, said, "The short-term funding market is tightening, which is exacerbating the real estate PF problem," and added, "Financial authorities need to conduct fact-finding investigations on loan statuses by project site to manage and prevent problematic projects from spreading to others."