[Donmaekgyeonghwa] Construction Sites Face 'Delinquency' Amid Financial Sector's Halt on Main PF

341 Trust Company Auctions in July and August... 54.3% Increase Compared to Same Period Last Year
Auctions in Seoul Rise While Daegu Faces 'Chosangjip'... Numerous Projects Fail to Surpass Main PF

The LegoLand debt default crisis is hitting the construction industry hard. The photo shows the Chuncheon LegoLand Korea Resort on the 24th.
[Image source=Yonhap News]

[Asia Economy Reporter Cha Wanyong] As the real estate project financing (PF) market cools down due to the real estate market slump and the Gangwon-do Legoland incident, insolvencies are occurring in various development projects nationwide. Cases where the land purchased is being auctioned off are rapidly increasing as the initial loans (bridge loans) are not extended or additional loans are not provided, effectively cutting off the "funding source."

According to the Korea Asset Management Corporation (KAMCO) Onbid system on the 26th, the number of land sales auctions by trust companies (classified as other general properties) totaled 341 cases in July and August this year, a 54.3% surge compared to 221 cases during the same period last year. This indicates that more trust companies, which had lent to developers but faced project failures, are trying to recover part of their loan amounts through land auctions.

Recently, cases of auctions have even appeared in Seoul. A mixed-use residential and commercial project located in Seodaemun-gu, which had completed permits, is scheduled for auction next month because the main PF loan following the bridge loan (for land acquisition) was not executed. The real estate PF funding market, which had mainly faced issues in provincial areas, is now experiencing tightening in Seoul as well, shocking the development industry.

The reasons for the developer’s failure to secure the main PF loan are complex. First, due to the global supply chain crisis causing soaring construction material prices, the savings bank initially set to provide the PF loan suddenly demanded a joint guarantee from the construction company. The construction company refused, and delays occurred while searching for another contractor. Meanwhile, concerns about real estate PF insolvency spread in the market due to U.S.-originated interest rate hikes and the real estate market slump. When financial authorities launched emergency inspections, the savings bank rejected the loan. Attempts to find refinancing loans to repay existing loans also failed. Ultimately, the land was handed over for auction.

Large-scale housing projects in the metropolitan area have also appeared in auctions. One such project is the Jang-an district development in Hwaseong, Gyeonggi Province. The plan was to build 14 buildings with a total of 1,595 apartment units and ancillary facilities on a site of 85,847㎡. However, due to delayed sales in February this year, loss of benefit of term occurred, leading to an auction. Daegu, where the real estate slump is severe, is in a dire state. Auctions have flooded areas including Daebak Mart site in Beomeo-dong, Suseong-gu, as well as Dongsan-dong in Jung-gu, Sangin-dong in Dalseo-gu, and Daemyeong-dong in Nam-gu.

Industry insiders agree that project bankruptcies are just beginning. Although not all projects have been auctioned, there is an overflow of demand to dispose of assets privately. A financial industry official said, "If projects are put up for auction, it leads to developer bankruptcies, so many are trying to dispose of assets privately," adding, "Some projects are surviving by extending the maturity of PF bridge loans."

For example, in the case of the Daewoo Apartment reconstruction project in Geoje Island, the main lenders are currently extending the principal without collecting interest from the developer. The bridge loan, arranged by KakaoPay Securities with participation from about ten savings banks, has not been converted into the main PF loan, and the maturity is being extended under a deferred interest condition.

The development industry expects that the number of projects going to auction due to PF loan issues will increase, expanding PF project insolvencies. Currently, many projects located in the metropolitan areas such as Uijeongbu and Incheon, as well as Daegu, Gyeongbuk, Daejeon, Sejong, Pyeongchang, and Jeju Island, are struggling because they have not been able to transition from bridge loans to main PF loans.