"PF Doing 10 Billion Won Business with 300 Million Won"…Regulations Needed Below 10% Equity Capital

"Government's 20% Target Lacks Realism... 10% Is Appropriate"
'Low Capital, High Guarantee' Structure Is the Root Cause of PF Crisis
Minister Park Sang-woo of the Ministry of Land, Infrastructure and Transport: "We Will Address Weaknesses in Korean-Style PF"

In the real estate project financing (PF) business, a proposal has been made to apply regulations if the developer's equity ratio falls below 10%. Given that the average equity ratio of developers is 3.2%, there are criticisms that the government's target of 20% is unrealistic.

On the 20th, a "Discussion on the Advancement of Real Estate PF" was held at the National Assembly Members' Office Building. From the third seat from the left in the front row are Park Sang-woo, Minister of Land, Infrastructure and Transport; Maeng Seong-gyu, Chairman of the National Assembly Land, Infrastructure and Transport Committee; Kang Jun-hyun, Secretary of the Political Affairs Committee; and Kim Seung-bae, President of the Korea Real Estate Development Association. Provided by the Korea Real Estate Development Association.

On the 20th, at a forum held at the National Assembly Members' Office Building titled "Discussion for the Advancement of Real Estate PF," Hwang Sun-joo, a research fellow at the Korea Development Institute (KDI), who presented at the event, stated, "Only a very small number of projects meet the government's future target of a 20% developer equity ratio. If the target is set too high immediately, project entities will give up on achieving it altogether, and if set too low, the policy's significance will be diminished. Therefore, an appropriate value would be around 10%." This comment was aimed at the Ministry of Land, Infrastructure and Transport's policy announced last November to provide incentives such as tax benefits for projects with an equity ratio of 20% or higher.

The basis for Researcher Hwang proposing a 10% equity ratio as the standard for regulation and incentives comes from KDI's research findings. KDI analyzed about 300 PF projects totaling 100 trillion won conducted between 2021 and 2023 and found that the average developer equity ratio was 3.2%. For example, in a 10 billion won project, the developer would only invest 300 million won to start the project. Researcher Hwang said, "Setting a realistic immediate target at 10%, and applying a slightly higher standard for commercial real estate or the metropolitan area where the equity ratio is relatively higher, could be feasible."

In the United States, Japan, and Europe, the equity ratio for PF projects is around 30-40%. The Korean-style PF structure, characterized by relatively low equity and high guarantees compared to other advanced countries, is widely analyzed as the fundamental cause of periodic crises such as those involving savings banks and Legoland, and it is said to trigger the annual "April crisis theory." This forum was also organized to discuss the problems of the Korean-style PF and ways to improve its structure. Another presenter, Lee Jin, a research fellow at the Korea Real Estate Development Association, proposed policies such as establishing an equity financing system to expand PF equity in the mid-to-long term, building an integrated PF statistics system, and strengthening the capabilities of Korean-style developers.

The forum was hosted by Maeng Sung-kyu, chairman of the National Assembly Land, Infrastructure and Transport Committee, and Kang Jun-hyun, secretary of the Political Affairs Committee, and organized by the Ministry of Land, Infrastructure and Transport and the Korea Real Estate Development Association. Dozens of participants from academia, the financial sector, construction industry, and government officials attended. Park Sang-woo, Minister of Land, Infrastructure and Transport, who gave the congratulatory speech, said, "During my over 40 years of public service, I have witnessed many development projects in Korea being realized through Korean-style PF," and added, "Since there are clearly vulnerable areas, we will listen carefully to the voices of various stakeholders to ensure that projects proceed with a stable structure."