Will the Box Office Failure of Dunchon Jugong Trigger a Crisis?… Bank of Korea Says "Not Very Likely"

As the largest reconstruction complex in Korea, Dunchon Jugong in Gangdong-gu, Seoul (Olympic Park Foreon) received a subscription performance lower than expected, drawing attention to the potential spread of a real estate project financing (PF) crisis. Some analysts suggest that if many winners back out during the actual contracts in January next year, the crisis could extend not only to the construction companies that provided joint guarantees on loan claims but also to small and medium-sized construction firms and other projects. However, the Bank of Korea viewed the possibility of a large-scale crisis as low, noting that the subscription competition rate was 3.7 to 1, indicating that the contract rate would not be significantly low.

According to financial and real estate industry sources on the 8th, concerns have been raised that the failure of Olympic Park Foreon's sales to attract buyers could ignite risks in the funding market. Although 13,647 people applied for the first-priority subscription and no size category was undersubscribed, even the highly popular "national size" 84㎡ (exclusive area) mostly recorded competition rates below 5 to 1, showing weak performance. This falls short not only of this year's Seoul private apartment subscription competition rate (26.4 to 1) but also of the 10 to 1 competition rate often cited as the threshold for unsold units.

Therefore, the government and market are closely watching the actual contract completion rate from January 3 to 17 next year. Even if subscriptions fill the quota, failure to convert them into actual contracts could signal the start of a crisis. A sales industry official said, "If the competition rate comes out lower than expected, winners will inevitably hesitate to sign contracts," adding, "Since many expect the real estate market to remain weak next year, there is also a possibility of undersubscription." In fact, Bukseoul Xi Polaris in Gangbuk-gu, which was sold in January, recorded a competition rate of 34.4 to 1 in the first priority but had unsold units, leading to a non-priority subscription.

Despite Olympic Park Foreon's excellent location, the main obstacles are the high sale price and low expected returns. For units 84㎡ and above, interim payment loans are not available, requiring over 1 billion KRW in cash. If future house price increases are anticipated, "cash-rich" buyers may flock to contracts, but considering high interest rates and the ongoing high-rate environment, securing returns is difficult. Even with over 1 billion KRW in cash, buyers are subject to a 2-year actual residence and 8-year resale restriction, and there is no need to focus solely on general sales, which have less favorable building units and materials compared to association member occupancy rights.

If the contract rate next year is lower than expected, the calculations for the government and the Bank of Korea will become more complicated. The maturity of 723.1 billion KRW in asset-backed commercial paper (ABCP) and electronic short-term bonds (ABSTB) for Dunchon Jugong, arranged by KB Securities and Korea Investment & Securities, is on January 19 next year. Depending on the contract results on January 17, failure to refinance the PF could escalate into a large-scale crisis. Construction companies such as Hyundai Engineering & Construction and HDC Hyundai Development, which provided joint guarantees, face immediate issues, but the rapidly freezing domestic funding market could also cause difficulties for small and medium-sized construction firms and projects.

However, the Bank of Korea does not see Dunchon Jugong as likely to trigger a major crisis. A Bank of Korea official said, "Even if 10-20% remain uncontracted and about 80% are contracted, a substantial amount of cash will come in, so the financial burden on construction companies will not be significant," adding, "In October, before sales and with a poor funding market, refinancing PF was difficult, but the situation now is different."

There are also many forecasts that the project will sell out smoothly since non-priority subscriptions can be held for contract cancellations. A real estate industry official said, "If winners do not sign contracts after winning the subscription, a 10-year re-subscription restriction applies, so giving up is not easy," adding, "Even if it moves to non-priority subscriptions, considering the preference for Seoul apartments, demand can be met."