Funds, REITs, and individual investors diversify capital sources
Active equity investments by insurers and participation of pension funds
Low guarantee burden... Strict evaluation of project feasibility
The government has set a goal to raise the equity ratio of real estate project financing (PF) projects, which previously had a low capital and high guarantee structure, to the 20% range by 2028. Meanwhile, it has been found that in major overseas countries, many projects have equity ratios reaching 40%. Investment by insurance companies as well as participation by pension funds are also active.
According to the results of a previous research project conducted by the Korea Development Institute (KDI) on the 14th, in the United States, about 30% of the total project cost of real estate PF is invested as equity, and since the 2008 financial crisis, many projects have an equity ratio exceeding 40%. In nearby Japan, 30-40% of the total project cost is covered by equity, with about 10% of that typically borne by the developer, usually a financial or large corporate affiliate. In the Netherlands, the structure consists of 10% by the developer and 25% by equity investors, investing 35% of the total project cost as equity.
Sources of capital such as REITs and financial institutions are also diversely distributed. In the United States, capital sources such as funds, REITs, financial institutions, and individual investors are well developed, contributing to the safety of development projects. Specialized insurance companies participate not only in PF loans but also in equity investments, and pension funds invest 5-15% in real estate from a long-term asset management perspective. Since both insurance companies and pension funds manage long-term assets, it is analyzed that they recognize real estate assets as appropriate investment alternatives.
In Japan, large banks participate in real estate PF projects as sponsor REITs, playing a major role as investors in the real estate market. In particular, since 2000, large developers affiliated with financial companies, large corporations, railway companies, and general construction companies have emerged in large numbers, driving market growth. Mitsui Fudosan, Tokyu Fudosan, Taisei Corporation, and Mori Building are representative examples. In the Netherlands, banks are not restricted from holding equity in non-financial companies, resulting in many real estate development companies operating as bank subsidiaries. ING Bank, a major Dutch bank, owns real estate development subsidiaries in France, Italy, and other European countries.
Because the equity ratio of PF projects is high, the guarantee burden in the United States and Japan is relatively low. In the United States, the developer guarantees payment independently, and the contractor has no guarantee burden other than responsibility for completion. If problems arise, the developer repays the loan with company assets.
In Japan, financing through the issuance of asset-backed commercial paper (PF-ABCP) is common, but unlike Korea, there is no credit enhancement procedure by securities firms. Like in the United States, contractors do not bear guarantee obligations beyond responsibility for completion. In Korea, to prepare for cases where the developer cannot repay the PF loan and the refinancing amount of asset-backed securities is insufficient, it is common for securities firms to enhance credit by committing to purchase securities held by investors.
Project feasibility evaluations are stringent. In the United States, lending institutions comprehensively assess the developer’s business performance, expertise, debt repayment ability, and appropriate equity ratio. In Japan, credit rating agencies conduct feasibility evaluations, precisely assessing debt ratios such as loan-to-value (LTV), rental yield, and the possibility of disposing of real estate after project completion. In the Netherlands, financial institutions conduct their own feasibility assessments, thoroughly examining profitability as well as the developer’s financial structure and experience.
A Financial Services Commission official explained, "Overseas, developers discover excellent projects and investors participate based on meticulous feasibility evaluations, establishing a sound PF structure. Advanced countries typically proceed with projects with an equity ratio of over 30%, and the structure extends to leasing rather than liquidation after development, resulting in high project stability and making it easier to increase equity through investment rather than loans."
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
