[Geumtongwi poll]② 68% of Experts Say "There Is a Possibility of Real Estate PF Crisis in the First Half of the Year"

Liquidity Concerns Persist Around Real Estate PF
Impact of High Interest Rates Remains Despite Successive Deregulations
Dunchon Jugong Contract Rate in Focus... Crisis Turning Point

Although the funding situation in the financial market has gradually improved since the beginning of the new year, there is still a high possibility of a crisis spreading in the real estate project financing (PF) market, according to analysis. Since there is a strong likelihood of additional interest rate hikes in both Korea and the United States through the first half of the year, and considerable concerns about the spread of a real estate market downturn, it is expected that the funding market will find it difficult to recover quickly.

On the 11th, Asia Economy conducted a survey of 23 domestic securities company economists and economic research institute researchers. When asked about the possibility of a crisis spreading in the real estate PF market in the first half of the year, 13 out of 19 respondents (68.4%) answered "moderate (7 people)" or "yes (6 people)." Six people responded that the possibility of a crisis was low, and no one said there was no possibility at all.

Although the corporate paper (CP) interest rate, which exceeded 5% at the end of last year, recently dropped to the 4% range, and the funding market instability has somewhat eased with Lotte Construction, which had been a source of concern, successfully selling PF bonds, experts say it is still too early to be optimistic about the market. Kim Seon-tae, a researcher at KB Kookmin Bank, explained, "Government liquidity injections and regulatory easing are having some effect, but additional interest rate hikes could again trigger credit risks for vulnerable groups and marginal companies."

In fact, many in the market believe that despite the government's successive easing of real estate regulations, if the Bank of Korea (BOK) continues to raise the base interest rate, the PF market will inevitably freeze again. Recently, the government significantly eased regulations on interim payment loans, reviving some demand for "Olympic Park Foreon (Dunchon Jugong)," considered a barometer of this year's real estate market, but the BOK's base rate decision could pour cold water on this. This complex is conducting contracts with successful applicants until the 17th, and a 77% initial contract rate must be achieved for a lump-sum PF repayment of 723.1 billion KRW to be possible.

Park Jung-woo, an economist at Nomura Securities, said, "Despite government regulatory easing, the downward trend in the pre-sale market is expected to continue," adding, "As a result, the cash flow of securities companies and construction firms could be disrupted." If the contract rate for Dunchon Jugong falls below 70% due to a loan interest rate reaching 7% and the overall decline in apartment prices, funding shortages could spread not only to KB Securities and Korea Investment & Securities, the PF asset-backed commercial paper (ABCP) underwriters, but also to other construction companies and projects.

Experts also expressed considerable concern about the overall bond market outlook for the first half of the year. Among 19 respondents, 9 said "slightly stable," but 6 chose "slightly unstable," and 4 chose "moderate," indicating that more than half expressed concerns. Cho Young-moo, a research fellow at LG Economic Research Institute, explained, "Because additional rate hikes and economic slowdown have not resolved funding market instability, bond market instability could persist for a considerable period." In fact, PF securitized bonds maturing in January amount to about 16.6 trillion KRW, and over 38 trillion KRW in the first half of the year, which could act as a 'time bomb' for the financial market depending on market conditions.

The funding market situation is also expected to be an important variable in the Monetary Policy Committee's operation of monetary policy this year. Lee Chang-yong, Governor of the Bank of Korea, said in his New Year's address, "Monetary policy should continue to focus on price stability," but also emphasized, "Special attention must be paid to the stability of financial and foreign exchange markets." The BOK plans to raise the base rate to 3.5?3.75% in line with inflation rates reaching the 5% range and the U.S. Federal Reserve's tightening, maintaining high rates for a considerable period, but if the liquidity crisis worsens beyond expectations, its room for maneuver could narrow.

However, some believe that since the government is strengthening monitoring, financial market instability will not spread significantly. Lee Jong-ryeol, Deputy Governor of the BOK, emphasized on the BOK blog on the 9th, "Even if some PF loans become non-performing, our financial system is assessed to be able to absorb losses internally." Cho Yong-gu, a researcher at Shin Young Securities, said, "The government and the BOK, as policy and monetary authorities, are making all-out efforts through liquidity support," adding, "While problems with some construction companies and distressed projects are inevitable, they are not at a level that cannot be managed given the anticipated risks."

Experts Responding to Asia Economy's Monetary Policy Committee Poll

Kang Min-joo, Economist at ING Bank; Kang Seung-won, Researcher at NH Investment & Securities FICC Research Department; Gong Dong-rak, Researcher at Daishin Securities Asset Research Department; Kim Seon-tae, Economist at KB Kookmin Bank; Kim Sung-soo, Researcher at Hanwha Investment & Securities; Moon Hong-chul, Researcher at DB Financial Investment; Park Seok-gil, Economist at JP Morgan; Park Jung-woo, Economist at Nomura Securities; Baek Yoon-min, Research Fellow at Kyobo Securities; Ahn Ye-ha, Researcher at Kiwoom Securities; Ahn Jae-gyun, Economist at Shinhan Investment Corp.; Woo Hye-young, Researcher at Ebest Investment & Securities; Yoon Seok-jin, Research Fellow at Hana Financial Management Institute; Yoon Yeo-sam, Research Fellow at Meritz Securities; Lee Jae-hyung, Researcher at Yuanta Securities; Lim Jae-gyun, Senior Researcher at KB Securities Asset Allocation Strategy Department; Jung Kyu-chul, Head of Economic Forecasting Office at KDI; Jung Sung-tae, Research Fellow at Samsung Securities; Cho Young-moo, Research Fellow at LG Economic Research Institute; Cho Yong-gu, Research Fellow at Shin Young Securities; Joo Won, Head of Economic Research Office at Hyundai Research Institute; Heo Jeong-in, Researcher at Daol Investment & Securities; Hong Chun-wook, CEO of Prism Investment Advisory

[Image source=Yonhap News]