[The Logistics Investment Counterattack]① Investment Firms Delay Logistics Center Acquisitions... Only Rolling Over PF Loans

Repeated Non-fulfillment of Pre-purchase Agreements Amid Potential Losses in Logistics Center Investments
Institutional Investors Face Inevitable Losses When Acquiring at Agreed Prices... Concerns Over PF Lenders' Deterioration

Since COVID-19, logistics centers, which had become a favorite investment destination for institutional investors, are recently showing signs of deterioration in various locations. Chasing high profitability, many rushed to purchase land and engage in logistics center development projects, only to face an oversupply situation. The number of projects being completed in an unsold state without filling tenants is increasing. As interest rates rise and construction costs soar, more projects that secured land through loans are unable to start construction. Developers and investors face inevitable losses, and the project financing (PF) lenders who provided funds for logistics center development are anxiously concerned about the risk of PF loan defaults.

Perspective view of the Cold Chain Logistics Center in Hang-dong, Jung-gu, Incheon.

Repeated Breaches of Logistics Center Purchase Agreements

As the attractiveness of logistics center investments declines, securities firms and asset management companies that had made pre-purchase agreements are increasingly delaying contract fulfillment. A pre-purchase agreement is a contract to acquire the logistics center at a predetermined price once construction is completed. From the developer's perspective, having a reputable investor's pre-purchase agreement reduces the risk of losses from development and facilitates PF fund procurement. Until a few years ago, institutional investors competitively signed pre-purchase contracts to secure logistics center volumes and earn profits.

However, the situation has changed recently, with institutional investors avoiding pre-purchase agreements or failing to fulfill them. The apparent reason for breach of contract is the failure to meet pre-agreed pre-purchase conditions. Defects (punch lists) or unpaid construction costs are cited as excuses. A financial company official said, "Most reasons investors give for breaching agreements are just excuses," adding, "In reality, they avoid fulfilling agreements because losses are inevitable upon execution."

A representative case is the cold chain logistics center project in Hang-dong, Jung-gu, Incheon. The developer, LSDC Co., Ltd., is developing a cold chain facility on approximately 13,865㎡ (about 4,224 pyeong) in Hang-dong 7-ga, consisting of 1 to 8 floors above ground. Construction is handled by Haeseong Construction, Seyoung Construction, and Orange ENC, who provided a completion guarantee agreement. They promised to bear the burden of repaying PF loans if construction is not completed.

Master Investment Management set up a fund and agreed to pre-purchase the logistics center. IBK Investment & Securities, Hyundai Motor Securities, and Hana Securities committed to acquiring approximately KRW 90 billion worth of beneficiary certificates in proportion to their investment shares. Meritz Securities contracted to provide about KRW 110 billion in secured loans when the fund purchases the logistics center.

The logistics center was completed early this year. Nevertheless, Master Investment Management and the three securities firms have not fulfilled the agreements made during the PF loan. Ostensibly, Master Investment Management is not fulfilling the pre-purchase agreement, but in reality, IBK Investment & Securities, Hyundai Motor Securities, and Hana Securities, which were to provide funds to the fund, have stated they cannot uphold their beneficiary certificate acquisition commitments. Since the pre-purchase agreement is not fulfilled, Meritz Investment Securities is also not obliged to honor the secured loan commitment.

Additionally, a major asset management company recently withdrew its plan to sell a large-scale complex logistics center in Seo-gu, Incheon. Although developed and sold under pre-purchase conditions, the decline in investment attractiveness has made fund recovery difficult. Also, a logistics center in Yeoju, leased by Coupang for ambient temperature logistics, had a conditional purchase contract based on cold storage facility completion, but the buyer canceled the purchase contract. Master Investment Management is also reportedly unwilling to fulfill its purchase commitment for the Anseong Iljuk cold storage logistics center.

PF Loan Maturity Extended Again and Again

Financial companies that lent development funds trusting institutional investors' pre-purchase agreements are tense about the possibility of loan defaults.

For the Incheon Hang-dong cold chain project, for which Master Investment Management provided a pre-purchase agreement, seven financial companies including SC Bank, BNK Capital, and IBK Capital extended a total of KRW 165 billion in development loans (PF loans), each providing between KRW 10 billion and KRW 30 billion. The loan maturity first came due in February. However, since Master Investment Management did not purchase the logistics center, timely repayment of principal and interest was not made.

The lenders extended the PF loan maturity to March under a deferred interest condition, then postponed the repayment date again to May. But as the pre-purchase agreement issue was delayed until May, the lenders are now in a position to declare an Event of Default (EOD) according to the agreement. According to industry sources, to minimize defaults, the securities firms, asset managers who provided the agreements, and the lenders are reportedly seeking solutions where they share losses gradually.

A PF official from a financial company said, "PF loans executed trusting pre-purchase agreements are increasingly not being repaid on time because institutional investors deliberately avoid fulfilling agreements to evade losses," adding, "If they refuse to fulfill agreements until the end, public auction disposal of the logistics center will be inevitable."