Koramco Escapes "Responsible Completion Risk," Only Two Responsible Completion Trust Projects Remain

Completion of "Korea Adelium 57 Unam 2nd Complex" Amid Contractor Rehabilitation
Lower Trust Non-Performing Asset Ratio and Improved Performance Through REITs and Funds... Turned to Profit

Koramco Asset Trust announced on April 24 that it has received approval for occupancy of "Korea Adelium 57 Unam 2nd Complex" from Buk-gu District Office in Gwangju Metropolitan City.

Korea Adelium 57 Unam 2nd Complex is a mixed-use building located at 1063-5 Unam-dong, Buk-gu, Gwangju Metropolitan City, consisting of two basement floors and 14 above-ground floors, with 19 apartment units and 8 neighborhood living facilities. The project began in May 2022 with the goal of completion in October 2024, but was delayed when the construction company, Korea Construction, filed for corporate rehabilitation.

At the time of the construction company's rehabilitation filing, Koramco formed a consultative body with the contractor, subcontractors, and the main creditor group. Without replacing the contractor, Koramco proposed a normalization plan that included business restructuring, such as reallocating the budget within the project financing limit. Koramco's technical team was stationed on-site, and the project was restarted under a completion-guaranteed managed land trust (so-called "responsible completion trust"). After about a year of construction crisis, the project received its occupancy approval on this day, just about 20 days before the responsible completion deadline.

Koramco now has two remaining responsible completion trust projects. Recently, the real estate trust industry has been facing difficulties, including accumulating operating losses and credit rating downgrades, due to risks associated with responsible completion trusts. There has been a surge in cases where the obligation for responsible completion is transferred from the contractor to the trust company, due to factors such as the downturn in local real estate markets and bankruptcies of small and medium-sized contractors. When this obligation is transferred to the trust company, it often leads to an increase in trust account loans, expansion of loan loss provisions, and even lawsuits with creditor groups. This has become the biggest burden for trust companies.

In fact, Korea Ratings recently downgraded the credit outlooks of Kyobo Asset Trust (A-) and Korea Investment Real Estate Trust (BBB+) from "stable" to "negative." This was due to concerns that the realization of contingent risks at responsible completion sites and the large scale of trust account loans relative to equity capital could undermine financial stability.

Last year, Koramco posted an operating profit of 58.2 billion won on a consolidated basis, turning a profit compared to the previous year. This was due to stable earnings from its main business portfolios?REITs and real estate funds?as well as a significant improvement in its trust division, where the ratio of non-performing assets was reduced from the previous 57% to 37%.

With the completion of the Unam-dong project in Gwangju, Koramco now has only two responsible completion projects remaining: the mixed-use development in Choryang-dong, Busan, and the commercial building reconstruction project in Jamwon-dong, Seoul. Both projects are expected to be completed within their responsible completion deadlines this year without difficulty. If so, Koramco will be completely free from responsible completion risk.

Lee Choongseong, head of the trust division at Koramco Asset Trust, explained, "Although responsible completion risk is spreading across the industry, Koramco has been managing its business stably through proactive and systematic risk management and selective order-taking." He added, "Going forward, we plan to respond to market changes by focusing on stable, risk-managed business and enhancing expertise, rather than pursuing reckless growth."

Koramco is the No. 1 asset manager in the domestic REITs market, managing a total of 33.4 trillion won in real estate assets (AUM) through REITs and real estate funds. Recently, the company has reorganized its management structure by adopting a system of separate CEOs for each business?REITs, real estate funds, and real estate trusts?to further strengthen expertise across all operations.