Average Non-Performing Asset Ratio Rises in Trust Industry Due to Completion-Guaranteed Risk
Koramco Asset Trust and Daehan Land Trust Reduce Non-Performing Ratios
Koramco Maintains Top-Tier 'A Stable' Credit Rating in Trust Sector for Eight Consecutive Years
The contingent liability risk related to the completion-guaranteed type managed land trust (책준형신탁) by real estate trust companies is materializing, leading to a series of credit rating downgrades for these companies.
According to industry sources on the 18th, NICE Credit Rating downgraded the short-term credit rating of Shinhan Asset Trust, a financial holding company-affiliated trust, from A2 to A2- in its regular evaluation for the second half of 2024. Korea Trust's long-term credit rating outlook was also lowered from BBB Stable to BBB Negative.
In the first half of last year, KB Real Estate Trust (from A2+ to A2) and Korea Land Trust (from A to A-) had already seen their credit ratings downgraded by one notch each. Mugunghwa Trust received a management improvement order from financial authorities after its management soundness deteriorated due to the fallout from the completion-guaranteed trust defaults.
The completion-guaranteed trust is a business model where the real estate trust company fulfills the completion obligation on behalf of the construction company if the latter fails to complete the project due to insolvency. In the early 2020s, it was the main source of revenue for real estate trust companies. However, since last year, as small and medium-sized construction companies unable to cope with soaring construction costs and high interest rates have failed to meet completion deadlines, the responsibility for completion has been fully transferred to the real estate trust companies. The losses of these companies have snowballed, becoming a major factor in credit rating downgrades.
The ratio of non-performing assets (assets below fixed grade) in the real estate trust industry is also rising. According to the Financial Supervisory Service's financial statistics information system as of the third quarter of last year, the non-performing asset ratios of Woori Asset Trust, Korea Asset Trust, and Shinhan Asset Trust exceeded 70%. The average non-performing asset ratio of 14 real estate trust companies was about 54%, up 14 percentage points from around 40% in the same period the previous year. Since non-performing projects that have not yet passed their completion deadlines are not included, concerns are growing that the non-performing asset ratio may increase further.
Despite this, some trust companies such as Daehan Land Trust and Koramco Asset Trust have shown improved performance. Daehan Land Trust's non-performing asset ratio was 51% the previous year but recently dropped to 41%. Koramco Asset Trust reduced its non-performing asset ratio from 57% to the mid-40% range, marking the largest decrease among the 14 trust companies.
The top-tier credit ratings in the real estate trust industry have also been maintained. Koramco Asset Trust's credit rating has been 'A Stable' for eight consecutive years, higher than financial holding company-affiliated trusts such as Shinhan Asset Trust (A-), Woori Asset Trust (A2-), and Kyobo Asset Trust (A-).
Daehan Land Trust and Koramco Asset Trust share the commonality of having a small proportion of completion-guaranteed projects and focusing on redevelopment projects. According to audit reports, Daehan Land Trust is currently handling nine completion-guaranteed projects, while Koramco Asset Trust has only four. This contrasts sharply with financial holding company-affiliated trusts like Shinhan Asset Trust and KB Real Estate Trust, which are managing 133 and 72 completion-guaranteed projects, respectively.
Among the recently spotlighted trust-type redevelopment projects, only these two companies have more than five completion sites. Currently, Daehan Land Trust has secured 22 redevelopment projects, and Koramco Asset Trust is conducting 19 redevelopment projects in major hubs of Seoul and the metropolitan area, increasing its presence. Koramco Asset Trust recently restructured its management and appointed Lee Choong-seong as the new head of the trust division, driving strong momentum in the real estate trust sector. Daehan Land Trust has expanded its urban business team to four teams to strengthen redevelopment projects.
An industry insider said, "The difference is becoming apparent between companies that used to win completion-guaranteed projects swept up by past market sentiment and those that focused on risk management and selective bidding." He added, "Similarly, in redevelopment projects, it is highly likely that real estate trust companies with accumulated completion experience and know-how will be spotlighted over those simply bearing the name of financial affiliates."
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