[Geuman Report] Bank of Korea "Local Real Estate PF, Caution Needed for Additional Defaults"

Regional Differentiation in Housing Prices Continues... Concerns Over Additional Defaults in Local Real Estate PF
Significant Contraction in Non-Residential Transactions Such as Townhouses and Multi-Family Units... Concerns Over Oversupply
Bank of Korea Financial Stability Report

Although the recent rise in delinquency rates on real estate PF (Project Financing) loans has slowed, warnings have been issued about the need to be cautious of additional defaults, particularly in regional real estate PF. This is because while housing prices in the Seoul metropolitan area continue to rise, regional areas are showing sluggish performance, leading to ongoing differentiation between regions. Additionally, transactions in non-apartment housing such as row houses, multi-family houses, and officetels have significantly contracted, raising concerns about the downturn in the non-apartment market.

Due to the impact of loan regulations and other factors, apartment transactions have slowed down, causing listings to continue accumulating. On the 24th, sales and jeonse (long-term lease) flyers were posted at a real estate agency in Gangnam, Seoul. Photo by Kang Jin-hyung

According to the Bank of Korea's Financial Stability Report on the 24th, the upward trend in PF loan delinquency rates has been slowing. The PF loan delinquency rate increased from 2.7% in Q4 last year to 3.55% in Q1 this year and 3.56% in Q2, before slightly easing to 3.51% in Q3.

As of the end of September, the amount of non-performing PF exposure stood at 22.9 trillion KRW, accounting for about 10.9% of the total real estate PF exposure of 210.4 trillion KRW. By type, land-secured loans (13.5 trillion KRW) and bridge loans (4.8 trillion KRW) were the largest, with many PF defaults occurring in the early stages of project development. By financial sector, non-bank sectors such as mutual finance (10.9 trillion KRW), savings banks (4.4 trillion KRW), and securities firms (3.8 trillion KRW) were concentrated with non-performing loans.

If non-performing PF exposure is gradually resolved going forward, the asset soundness of financial institutions is expected to improve. Since most of the non-performing PF loans are bridge loans and land-secured loans at the pre-construction land acquisition stage, and the proportion of main PF loans is low, it is analyzed that the impact of real estate PF restructuring on the construction industry will not be significant.

However, concerns about additional PF defaults are growing recently, especially in regional real estate. This is due to the differentiated trends in housing prices between the Seoul metropolitan area and regional areas. As of Q3, unsold housing units in the metropolitan area were only 14,000, whereas non-metropolitan areas had 53,000 units, accounting for about 80% of total unsold housing. The initial sales rate of apartments also declined mainly in non-metropolitan areas. The initial sales rate in the metropolitan area reached 70% in Q3, but only 45% in non-metropolitan areas. If the sluggishness in the regional real estate market continues, delays in procedures such as land acquisition and permits are likely, increasing the risk that even if projects move to the sales stage, construction payments may not be collected on time, leading to project defaults.

The non-apartment market, including row houses, multi-family houses, and officetels, continues to show weak performance. Comparing price increases by real estate type over the past year as of last November, apartments in the metropolitan area rose by 1.8%, and single-family/multi-family houses by 2.1%, but row houses/multi-family houses fell by 0.2%, and officetels by 1.4%. In regional areas, single-family/multi-family houses increased by 0.7%, while apartments (-1.6%), row houses/multi-family houses (-1.2%), and officetels (-2.9%) all declined simultaneously.

A Bank of Korea official pointed out, "Real estate PF in Korea relies heavily on borrowing and pre-sale proceeds due to developers’ low equity capital, making the PF structure highly sensitive to financing costs and sales rates."

He added, "If the structural limitations of real estate PF are improved through the 'Real Estate PF System Improvement Plan' announced last November, it will help prevent the realization of risks related to the repeated rapid increase in PF loans, contribute to the formation of stable real estate development conditions, and ease the cyclical sensitivity of the real estate market. However, since loan screening by financial institutions is being strengthened and the capital expansion burden on real estate developers is increasing, there is also a possibility of supply contraction. Therefore, care must be taken to avoid side effects during the future policy implementation process."