1 Trillion Won Redevelopment Contract Competition, PF Approval Is Key

The construction company selection for Hannam District 2, scheduled for the 5th, is raising concerns about financing due to intense competition among bidding construction companies. The photo shows an aerial view of the Hannam-dong redevelopment area. Photo by Hyunmin Kim kimhyun81@

[Asia Economy Reporter Cha Wanyong] As the competition for orders heats up for projects located in prime areas such as Seoul Hannam 2 District, Sindang 8 District, and Ulsan Jung-gu B-04 redevelopment?each with construction costs exceeding 1 trillion won?concerns about financing risks are emerging. With the combined effects of interest rate hikes, a real estate market downturn, and worries about real estate project financing (PF) defaults, financial institutions are raising the bar for real estate-related loans.

According to the urban maintenance industry on the 2nd, Daewoo Construction and Lotte Construction are competing for orders in Seoul Hannam 2 District; Daewoo Construction and POSCO Construction in Seoul Sindang 8 District; and Samsung C&T and Hyundai Construction in Ulsan Jung-gu B-04 District, offering striking terms to the associations.

In particular, for Hannam 2 District, where the contractor selection is scheduled for the 5th, Daewoo Construction and Lotte Construction proposed moving-in cost loans with loan-to-value ratios (LTV) of 150% and 140%, respectively, exceeding the collateral value. Daewoo Construction also plans to lend the entire project cost based on the general meeting's resolution, while Lotte Construction has pledged a total project cost of 1 trillion won, including project promotion expenses.

The problem is that the financial support for moving-in costs and project costs provided by these construction companies is made through PF loans. Regarding moving-in cost support alone, the legal limit guaranteed by the Seoul Housing and Urban Guarantee Corporation (HUG) is 40%. The remainder must be covered by self-funding or PF loans. The same applies to project costs.

However, redevelopment sites such as Heukseok 11 District, which recently started projects, are experiencing project delays due to the failure of PF loan approvals, resulting in no support for moving-in costs and ongoing conflicts between associations and construction companies. Issues that were not problematic when construction companies won maintenance project rights?due to low interest rates and rising housing prices?are now becoming risks.

It is also difficult to set a long project period to secure PF loan approval. Especially in uncertain markets affected by interest rate hikes, rising raw material prices, and real estate downturns, disputes between construction companies and associations may arise later. If sales are delayed, contract renegotiations between construction companies and associations are necessary, leading to disputes over responsibility.

For example, Gongdeok 1 District completed moving and demolition after management disposition approval in April 2018 but has not progressed with the project for over three years. The association wants construction cost increases calculated based on the consumer price index, while the construction company prefers the construction cost index, effectively halting the project. There are several such cases.

Concerns are also high in the maintenance industry regarding Seoul Sindang 8 District and Ulsan Jung-gu B-04 redevelopment sites. Sindang 8 District has a bid in December, and Jung-gu B-04 closes bids on the 2nd. Both are recognized as prime projects, so intense competition among companies is expected.

Of course, these projects have some time flexibility. Hannam 2 District will select a contractor on the 5th, allowing about a year until moving-in, and Sindang 8 District and Ulsan Jung-gu B-04 are expected to select contractors next year, during which the PF loan environment may change. Construction companies participating in the bids seem to be pushing forward with the expectation that PF loan conditions will ease, given the remaining time.

A representative from a participating construction company said, "Although moving-in cost support issues arise due to PF loan rejections in projects currently starting, the situation will improve about a year after the project fully begins. If financing conditions remain difficult then, we can inject self-funds or secure funds through various methods."

Another factor reducing risk concerns is that these projects are prime sites with guaranteed sales. An industry insider analyzed, "Hannam 2 District, Sindang 8 District, and Ulsan Jung-gu B-04 are such prime projects that the creditworthiness of participating construction companies is good, and sales are partially guaranteed, so there is a high possibility that financing will not be a major issue when the projects fully commence."