[Inside Chodong] Real Estate PF 'Restructuring': The Die Is Cast

Sorting the Wheat from the Chaff Among 5,000 Projects
Up to 10% to Undergo Restructuring Starting in June

Financial authorities will begin full-scale restructuring of the 230 trillion won real estate project financing (PF) market starting in June. Up to 10% of projects are highly likely to undergo rapid restructuring, auction sales, or liquidation. Projects that have extended loan maturities four times, extended maturities without paying overdue interest, or have failed auction sales three or more times are prioritized for restructuring.

The authorities’ stance and perspective have become more stringent. Although the word “restructuring” was not explicitly used, they presented specific timing and quantitative and qualitative criteria, signaling a phase shift where the financial sector and construction industry will simultaneously intervene in distressed projects entangled in complexity. The ambiguity of goals raised when liquidity policies focusing on guarantee strengthening, construction company support, and housing supply activation were announced repeatedly since October 2022 has disappeared.

The changed perspective is indirectly confirmed through the remarks of Kwon Dae-young, Secretary General of the Financial Services Commission. “Until now, there have been concerns about a sharp contraction in funding supply and the soundness of some financial companies and construction firms due to high uncertainty in the PF market, but through joint efforts by the private and public sectors to stabilize the PF market, I believe that the situation, capacity, and policy tools necessary to carry out a smooth soft landing process have now been sufficiently established.” (During the announcement of real estate PF policy direction)

Removing the embellishments, this can be interpreted as “Preparations for restructuring the real estate PF market have been completed, and accordingly, a safety belt for a soft landing has been fastened, so from now on, surgical policy measures will be deployed.”

Since October 2022, the authorities have poured more than 80 trillion won into bond stabilization funds, corporate bond and commercial paper (CP) purchases, market stabilization primary collateralized bond obligations (P-CBOs), and PF operator guarantees. The corporate bond spread narrowed from 177 basis points (bp) (1bp=0.01 percentage point) to 46bp, and the CP spread decreased from 240bp to 68bp. In March this year, an additional 9 trillion won was injected through the Emergency Economic and Livelihood Meeting to expand PF operator guarantees and establish new guarantees for non-residential operators.

What were the results of these liquidity support and guarantee strengthening policies? The general analysis is that it is difficult to make a definitive conclusion. The PF normalization fund led by the Korea Asset Management Corporation (KAMCO) managed to close only one new deal in the year following its establishment in March last year, during which mid-sized construction company Taeyoung Construction filed for a workout (corporate financial restructuring), and concerns surrounding large construction companies such as Shinsegae Construction and Lotte Construction continued.

It is also unclear whether market participants have sufficiently strengthened their capacity. Despite astronomical capital injections, the soundness and liquidity environment of the secondary financial sector, including savings banks and capital companies, deteriorated. Eventually, voices of dissatisfaction emerged within the secondary financial sector, and tension arose between the secondary financial sector and authorities just before the announcement of the PF restructuring direction.

Despite government denials labeling them as baseless rumors, crisis theories continuously circulated in the market. Some in the financial and real estate markets criticized the authorities’ policies as measures that merely postpone the crisis. Criticism has persisted for months that both the government and the market fell into complacency, thinking “it will be resolved if we just wait a little longer,” regarding the real estate downturn and the global high-interest-rate environment, thereby increasing the burden.

If, as the authorities claim, the situation and capacity for a soft landing have been established, the efficiency of PF restructuring will improve; otherwise, there is a risk of drifting. Furthermore, once full-scale restructuring begins, sacrifices by market participants will be inevitable, as the authorities’ position states that “along with policy efforts, efforts by market participants to coordinate understanding and share losses commensurate with risks are necessary.” The degree of sacrifice is expected to be inversely proportional to the level of preparation made by the authorities.

Lee Bok-hyun, Governor of the Financial Supervisory Service, recently told reporters, “There is no intention to delay (the real estate PF restructuring).” Starting in June, the government will accelerate the sorting and follow-up measures for approximately 5,000 real estate PF projects. It is difficult to gauge how intense the waves of restructuring will be and where the repercussions will lead, but if it is for the well-being of the national economy, it is hoped that mistakes and delays will not be repeated. The dice for the “real estate PF restructuring,” which had to be done someday, have been cast.