[Frozen PF Market] ① One Year Since the 'Legoland Incident'... At Least 47 Trillion Won in Real Estate PF Loans Sustained by Interest

Extension of Loan Maturities Without Fund Recovery Amid Worsening Real Estate Development Profitability
Uncertainty Remains Over Effectiveness of Government's PF Support Measures
Concerns Over Accumulating Potential Defaults and Recurring Crisis Speculations in September, Next March and June

Concerns about a crisis triggered by domestic and international real estate finance and rising market interest rates are stirring unease in the financial markets. The government and financial authorities believe the situation is improving, noting that the delinquency rate of real estate project financing (PF), the epicenter of the crisis rumors, is slowing its upward trend. They also maintain that even if some defaults occur, they are at a level manageable within the domestic financial system. However, voices from the field tell a different story. Most projects are merely extending the maturity of PF loans without progressing normally. When maturities are extended, the delinquency or default rates of financial companies do not increase.

The situation is similar for overseas real estate investments. Ninety percent of maturing overseas investment volumes are extending their maturities without recognizing losses on their financial statements. As domestic and international real estate markets fail to improve, 'potential defaults' that raise concerns about insolvency are accumulating. Even if a crisis does not erupt immediately in September, there is a high likelihood that crisis rumors will be periodically raised around the end of this year, March next year, and June next year as large-scale maturities of extended domestic and overseas real estate financing repeatedly come due.

On the 27th, participants took part in the PF Lenders Group plaque unveiling ceremony at the PF Lenders Group agreement meeting held at the Bankers Hall in Jung-gu, Seoul. From left to right: Jung Ji-won, President of the Korea Non-Life Insurance Association; Jung Hee-soo, President of the Korea Life Insurance Association; Kim Kwang-soo, Chairman of the Korea Federation of Banks; Lee Bok-hyun, Governor of the Financial Supervisory Service; Kim Ju-hyun, Chairman of the Financial Services Commission; Kwon Hyuk-jin, Director of the Housing and Land Office at the Ministry of Land, Infrastructure and Transport; Kim Cheol-ju, Chairman of the Financial Creditors Adjustment Committee; Jung Wan-gyu, President of the Korea Credit Finance Association; Oh Hwa-kyung, President of the Korea Federation of Savings Banks. Photo by Yoon Dong-ju doso7@

Real Estate PF Loans Total 133 Trillion Won... Maturities Keep Being Extended

According to financial authorities, as of the end of June this year, the outstanding balance of real estate PF loans totaled 133.1 trillion won, an increase of 1.5 trillion won compared to the end of the first quarter. Banks and insurance companies hold the largest PF loan amounts, each around 43 to 44 trillion won, followed by specialized credit finance companies including capital companies with 26 trillion won. Savings banks and securities firms hold PF loans of 10 trillion won and 5.5 trillion won, respectively.

When including PF loans, contingent liabilities, equity investments, funds, and REITs (Real Estate Investment Trusts), securities firms have overwhelmingly the largest PF exposure. The securities industry's PF exposure amounts to 47.6 trillion won. This is only a slight decrease from 47.9 trillion won at the end of June last year before the Legoland incident. Considering that there have been almost no new PFs in the past year, this means that most of the maturing existing PF loans have not been properly recovered and remain outstanding.

Among these, contingent liabilities such as developer guarantees, debt assumption, and securitized bond purchase commitments account for the largest portion at 28.7 trillion won. Contingent liabilities arise when securities firms agree to repay debts or purchase PF securitized bonds on behalf of developers if the developers run out of funds. Although these are not debts that must be repaid immediately, they become direct liabilities if the developer faces difficulties, hence the term contingent liabilities. An investment banking (IB) industry official said, "Most developers are facing financial difficulties due to falling real estate prices and rising construction costs," adding, "As the profitability of PF projects deteriorates, a significant portion of contingent liabilities is likely to convert into debt repayment burdens for securities firms over time."

In addition to contingent liabilities, securities firms' direct PF loans and equity investments amount to 8.3 trillion won. Investments through public and private funds or REITs total 10.7 trillion won. Among securities firms' direct loans, it is known that a high proportion are mezzanine or subordinated loans with a high risk of loss. The delinquency rate of direct loans has also been rising recently. The risk of losses from equity investments has expanded due to the worsening profitability of development projects. The same applies to contingent liabilities, funds, and REITs.

Due to the deterioration in PF project profitability, over 70% of domestic PF projects maturing in the first half of this year have only extended their loan maturities. Eighty percent of bridge loans, which have not been converted to main PF loans, have extended their maturities without proper project progress. Bridge loans are short-term loans taken to secure land before obtaining development permits. If bridge loans do not transition to main PF loans, it is difficult to recover the funds.

About 50-60% of main PF loans have also had their maturities extended. A PF industry official explained, "Developers pushing forward development projects are suffering from multiple hardships such as soaring construction costs and increased interest burdens," adding, "Many PF projects are stuck in a situation where they can neither proceed nor withdraw, only extending the maturity of PF loans."

Whether the PF support measures introduced by the government will work properly remains uncertain. An industry official said, "Policies that supply some liquidity to PF projects may somewhat reduce the default risk of financial companies," but added, "Unless private funds from banks and others are sufficiently supplied in a situation where the profitability of development projects does not improve, concerns about insolvency will inevitably continue."

Potential Defaults Also Expanding in Overseas Real Estate Investments

In addition to PF concerns, overseas real estate investments are also cited as a factor for potential defaults. According to the Korea Financial Investment Association, the outstanding balance of overseas real estate funds (both public and private) held by domestic financial companies is 74.5 trillion won. Among these, securities firms have the largest overseas real estate exposure at about 14 trillion won. This includes direct loans, contingent liabilities, and equity investments in overseas real estate.

According to the IB industry, as of the end of the first half, domestic securities firms' overseas real estate finance exposure is mostly concentrated in the U.S. and Europe, totaling 11.7 trillion won. Of this, investment in U.S. and European office sectors, excluding logistics facilities, hotels, infrastructure, and residential properties, is about 6 trillion won.

Since the COVID-19 pandemic, with the rise of remote work, office vacancy rates in the U.S. and Europe have been rapidly increasing. Even offices with long-term master lease contracts exceeding 15 years with global IT and retail companies are seeing contract terminations, causing vacancy rates to rise swiftly.

In particular, offices in major English-speaking regions heavily invested in by domestic institutional investors?such as the U.S. West Coast where Silicon Valley companies are concentrated, France's La D?fense area, and London in the U.K.?are mostly facing loss concerns. As of the end of the first half of this year, the average vacancy rate for U.S. offices reached a record high of 20.6%. European office vacancy rates are also on the rise. The increase in interest rates on secured loans taken at the time of investment is also contributing to the decline in commercial real estate prices. The rising refinancing costs have worsened the profitability of commercial real estate.

A securities firm's alternative investment division official said, "Most overseas real estate investments by domestic institutional investors, including securities firms, are in fund form," adding, "Especially for securities firms, there are more equity investments or subordinated investments than senior loans, so losses could be significant when office prices fall." The official warned, "With the increase in remote work in the U.S. and Europe, office prices in existing overseas real estate investment locations are likely to continue declining," diagnosing that "the overseas real estate investment sector, along with domestic PF projects, is acting as a financial sector's default risk trigger."