[Diagnosis of Yoon Administration's Capital Market Policy] Securities Firms "Real Estate PF Market Expected to Rebound After Second Half of Next Year"

Survey Conducted with 10 Major Securities Firms
Expectations for Second Half of 2025, 3 out of 10 Firms Most Frequent
Priority on Interest Rate Cuts and Real Estate Stability Needed

In the market, there is a consensus that the 2024 real estate project financing (PF) crisis is either less severe or similar compared to the 'Legoland incident' in October 2022. It is observed that concerns are less intense than during the peak of liquidity squeeze fears caused by the default risk of Legoland in Gangwon Province. However, it is diagnosed that a sufficiently low interest rate environment must be established for the domestic real estate PF market to regain momentum. The government also expressed opinions that, while accelerating the stagnant redevelopment projects, additional incentives should be prepared to attract private capital during the normalization process of distressed projects.

Less severe than in 2022... rebound expected after 2025

According to a survey conducted by Asia Economy on the 27th targeting 10 major domestic securities firms regarding the 'Yoon administration's capital market policy,' opinions were evenly split between 'less severe (5 firms)' and 'similar (5 firms)' when comparing the current real estate PF crisis to the Legoland incident in October 2022. At that time, a special purpose company (SPC) under Gangwon Province issued real estate PF asset-backed commercial papers (ABCP) worth 205 billion KRW to build Chuncheon Legoland, which ultimately defaulted. Consequently, the 91-day corporate paper (CP) rate exceeded 4% for the first time since January 2009. Thanks to the financial authorities' emergency liquidity supply measures amounting to 50 trillion KRW, the market squeeze was temporarily resolved.

Regarding the rebound timing of the domestic real estate PF market, 3 out of 10 securities firms predicted the second half of 2025. Some mentioned an earlier period in the first half of 2025 (2 firms), but opinions were divided with some expecting the first half of 2026 (1 firm) and the second half of 2026 (2 firms). They analyzed that this would only be possible if market interest rates sufficiently decrease and real estate prices stabilize.

Currently, real estate indicators are mixed, divided between Seoul and other regions. According to the Ministry of Land, Infrastructure and Transport's 'June Housing Statistics,' the nationwide unsold housing units increased by 1,908 units from May to 70,437 units, marking a seven-month consecutive increase. On the other hand, apartment transaction volume in Seoul recorded 6,150 cases, the highest in the past three and a half years. Choi Hee-moon, Chief Investment Officer (CIO) of Meritz Financial Group, also pointed out that for the real estate PF market to rebound, "the rebound momentum in Seoul's real estate market must spread to other regions, resolving unsold inventory, and major construction companies must gain confidence in new sales due to improved financial conditions."

The background for the call for interest rate cuts is closely related to soaring financial and construction costs. According to the Korea Institute of Civil Engineering and Building Technology, the construction cost index in June this year was provisionally calculated at 130.02 (based on 100 in 2020). It rose by 27.4% in three years from 102.04 at the end of 2020. The construction cost index indicates the price level of materials, labor, and equipment used in construction projects. The Bank of Korea, which holds the authority to set the base interest rate, is also facing a dilemma. On the 22nd, the Bank of Korea kept the domestic base rate at 3.5% and maintained its monetary tightening stance. This marks the 13th consecutive hold since February last year. However, with Jerome Powell, Chair of the U.S. Federal Reserve, mentioning the possibility of a rate cut in September, there is analysis that the burden of rate cuts for central banks worldwide has eased.

Policy incentives urged to enhance redevelopment project profitability

The securities industry agreed that distressed PF projects need to be resolved quickly during the government's real estate PF market restructuring process. One securities firm argued, "It is necessary to provide incentives that enhance the profitability of real estate redevelopment projects to resolve the situation where funds are tied up for too long in stalled redevelopment projects." Another securities firm pointed out, "Various benefits should be provided according to the speed of quick resolution and normalization of distressed PFs."

Earlier, the Financial Services Commission announced in May its 'Policy Direction for an Orderly Soft Landing of Real Estate PF,' strengthening the evaluation of real estate PF project feasibility. Projects are classified into two categories: those with sufficient feasibility and those lacking it. The core is to promote the circulation of real estate PF funds. In particular, for some projects lacking feasibility, the policy aims to encourage PF market participants such as developers, contractors, and financial companies to restructure and resolve issues independently.

Some argued that financial institutions that resolve distressed projects early should be given incentives to participate preferentially in new projects, but this was countered as unrealistic. Professor A, who requested anonymity, pointed out, "Since new projects are also all private projects, it does not seem logically appropriate for the government to grant priority to specific companies."

Meanwhile, there was also a suggestion that profits returning to financial institutions should increase to facilitate smooth acquisition of distressed bonds during the restructuring and resolution process of distressed projects. One securities firm argued, "Profits gained during the PF normalization process should be shared with capital providers, i.e., financial institutions, so that PF projects can smoothly secure funding." It was said that for private financial institutions to participate more actively, a structure allowing profit distribution beyond existing fixed interest receipts on mezzanine and subordinated loans would be necessary.

On the other hand, there was also a conviction that no incentives are necessary under government policy. A securities firm official said, "For now, we should observe the market situation, and so far, no additional incentives seem necessary."