Real Estate PF Crisis That Even Made the CEO Pack Up... Concerns Over Supply Contraction

Amid rising raw material prices, concerns over a real estate market downturn, and a compounded liquidity crisis, a major construction company CEO has stepped down. Worries are growing that the risk of non-performing real estate project financing (PF) loans has surpassed the crisis level of individual companies and could lead to a contraction across the entire market.

According to Lotte Construction on the 22nd, CEO Ha Seok-ju expressed his intention to resign ahead of the scheduled executive personnel announcement. Ha's original term was set to expire in March next year, but he announced his resignation in advance. Industry insiders view Ha's resignation as a matter of responsibility due to Lotte Construction's liquidity crisis. An industry source stated, "Ha expressed his intention to resign last week, which was initially rejected, but he reiterated his resignation."

Lotte Construction has recently faced a liquidity crisis following the Legoland default incident and has been receiving financial support from its affiliates. On the 18th of last month, it conducted a capital increase worth 200 billion KRW and borrowed 500 billion KRW from Lotte Chemical in the same month. This month, it agreed to borrow 300 billion KRW and 100 billion KRW for three months from Lotte Fine Chemical and Lotte Homeshopping, respectively. On the 18th of this month, it borrowed a total of 350 billion KRW from Hana Bank and Standard Chartered Bank Korea. Additionally, earlier this month, it secured a loan of around 300 billion KRW using its headquarters building in Jamwon-dong, Seocho-gu, Seoul, as collateral. These developments have fueled various speculations, even leading to rumors of a 'chain bankruptcy of construction companies.'

Moreover, the disappointing outcome in the bidding war for Hannam 2 District in Yongsan-gu, Seoul?considered the biggest redevelopment project in the second half of this year?has also been seen as a significant burden. The competition escalated into a mudslinging fight with rampant black propaganda and even police complaints.

Ha's resignation and the appointment of his successor will be decided through Lotte Construction's board of directors. Park Hyun-cheol, head of management improvement at Lotte Holdings (President), is reportedly being considered as a successor.

The government is also taking the circulating liquidity crisis rumors in the market very seriously amid these ongoing events. In particular, the Ministry of Land, Infrastructure and Transport (MOLIT) is concerned about the recent financial tightening as the biggest market variable, given its responsibility for supplying 2.7 million housing units under the current administration's real estate policy.

At a press briefing held yesterday at the Government Complex Sejong, MOLIT Minister Won Hee-ryong stated that the most worrisome issue beyond the recent sharp price drops and transaction freezes in the real estate market is the shortage of housing supply caused by the contraction of real estate financing. Minister Won said, "Considering the real estate market situation and macro-financial conditions such as interest rates comprehensively, the more concerning point is the excessive contraction of supply financing." He added, "(The tightening of real estate financing) could lead to a reduction in housing supply, and the resulting housing supply shortage is somewhat predictable," and explained, "(This situation) accumulates the potential for future housing price surges, so it cannot be left as is."

Minister Won emphasized, "Some securities firms that have recklessly managed PFs and focused on profit-sharing should bear more costs, and a collective financial safety net involving construction companies and mutual aid associations must be established." He also said, "We plan to closely coordinate with related authorities such as the Ministry of Economy and Finance to present countermeasures within this year to ensure that the financial tightening does not become acute but gradually eases."