Increase in PF Equity Ratio through Landowner's In-Kind Contribution... "Will Vary Depending on Project Feasibility"

PF Project Developers' Equity Ratio Targeted at Advanced Country Levels
Responsibility for Completion Revised, PF Integrated Information System Established
Fostering 'Professional Developers' with Development and Operation Capabilities
Experts Say "Institutional PF Positive, Realization Uncertain"

#. Business operator Mr. A is promoting a project financing (PF) project with development costs of 100 billion KRW (land cost 30 billion KRW · construction cost 70 billion KRW), a project period of 40 months, and a liquidation value of 150 billion KRW, while receiving land as an in-kind contribution from the landowner. The landowner did not sell the land but participated as a shareholder in the project. As a result, with a 30% equity ratio, Mr. A skipped the bridge loan and raised the main PF loan at an interest rate of 7%. This saved about 17 billion KRW (33.3 billion KRW → 16.3 billion KRW) in financial costs compared to proceeding with the project through a bridge loan. Not only did the total project cost decrease and profits increase, but the possibility of project failure due to delays was also reduced. Under the existing method, the land would have been purchased with capital of about 3 billion KRW, which is 10% of the land cost, by taking a bridge loan (27 billion KRW · interest rate 12%), and the project would have proceeded with the main PF loan (interest rate 9%) at the start of construction.

The government has proposed a measure to induce 'in-kind contributions from landowners' to increase the equity ratio of PF operators. This is a measure to prevent a chain collapse, where small-scale developers who cover land costs with high-interest loans fail to repay and thus make project promotion difficult, causing even the construction companies that provided guarantees to collapse. The plan is to fill the land cost, which is about 30% of the total project cost, with in-kind contributions from landowners to raise the equity ratio to the level of advanced countries (20%).

On the 14th, the Ministry of Land, Infrastructure and Transport announced the 'Real Estate PF System Improvement Plan' as an agenda item at the Economic Ministers' Meeting held at the Government Seoul Office. The plan aims to enhance PF stability and activate housing supply.

Increase PF Equity Ratio with Incentives

First, incentives will be provided to increase the equity ratio of PF operators. The government plans to amend the 'Tax Incentives Control Act' considering the timing of profit realization by contributors, delaying the taxation and payment of capital gains on landowners who make in-kind contributions. In addition, regulatory exemptions such as floor area ratio and public contribution relief will be granted to development projects by developers with high equity ratios. This will be included in the 'Real Estate Development Project Management Act' to be proposed in the first half of next year. Furthermore, internal regulations of the Housing and Urban Guarantee Corporation (HUG) and the Korea Housing Finance Corporation (HF) will be revised to offer fee discounts for projects with low guarantee risks.

An official from the Ministry of Land said, "Both ruling and opposition parties agree that PF is in a blind spot, so we decided to propose the Real Estate Development Project Management Act," adding, "There is no case where the risk is zero when pursuing development profits. However, this is a proposal to provide options to increase the equity ratio and is not mandatory."

The government will also improve the structure of the PF market to ensure the effectiveness of these incentives. To this end, standards and procedures for PF feasibility evaluation will be established, and it will be mandatory to conduct feasibility evaluations by professional evaluation agencies when applying for loans. Evaluations will be conducted by the private sector, and research will be conducted on how financial institutions accept evaluation results. The Ministry of Land will also revise the practice of construction companies or trust companies bearing completion responsibility to reduce risks for financial institutions. The Ministry plans to operate a task force (TF) to prepare improvement measures for completion responsibility by the first quarter of next year. Additionally, an integrated PF information system will be established to comprehensively track projects from the initiation stage to sales rates in any region.

An official from the Ministry of Land said, "We have carefully considered to prevent housing supply from shrinking," adding, "If in-kind contributions of idle land, which amount to 24 times the area of Yeouido, are activated, it will revitalize the real estate development market and improve housing supply conditions."

Moreover, the government plans to activate REITs (Real Estate Investment Trusts) to foster developers capable of both development and operation domestically. The plan is to supply prime land to REITs to induce specialized developments such as landmark commercial facilities within regions and to nurture professional developers who have accumulated operational know-how. A representative example is Mori Building Co., which develops and operates Roppongi Hills in Tokyo, Japan.

'Bringing PF into the Light' Has Meaning but...

Experts did not oppose the government's policy to manage PF projects within the legal system. However, they believe that it is difficult to solve the PF crisis immediately because legal amendments are required. In particular, while increasing the equity ratio of PF operators is important, they see the need for supplementary measures because PF projects without feasibility are becoming insolvent.

Researcher Huh Yoon-kyung of the Korea Construction Industry Research Institute analyzed, "For this measure to be effective, the Tax Incentives Control Act must be amended first, and even if amended, landowners' willingness to participate in equity will inevitably vary depending on project feasibility." She explained, "In areas with good feasibility, developers will try to endure regardless of the measures, while in areas with poor feasibility, landowners will judge that selling the land and exiting is better," adding, "The effects may be polarized between the metropolitan area and provinces." She also added, "Landowners' participation means more decision-makers, which could delay the project further, so it is questionable whether it can be practically utilized."

Researcher Lee Eun-hyung of the Korea Institute of Construction Policy said, "A compromise is needed between 'managing PF risks proactively by raising capital standards' and 'making high-risk, high-return projects difficult,'" adding, "It is expected to take a lot of time to adjust this."