[Q&A] "Will LH's Financial Burden Lead to Reduced Construction Costs for Private Participation?"... Flood of Questions at First Briefing After September 7 Measures

5,181 Units in Incheon, Suwon, and More for Second-Half Private Participation Projects
LH to Cover Interest and Guarantees Even If Units Remain Unsold
HUG Guarantees to Ease Construction Firms' Financial Burden
"Public Offerings Favor Major Firms... Entry Barriers for Newcomers"

Korea Land and Housing Corporation (LH) will launch its first public housing construction project with private sector participation (Minchan) since the government's "September 7 Housing Supply Expansion Plan," starting next month. The project will supply 5,181 units, with a total project cost of 1.2 trillion won. For the first time, private brands will be featured in apartments directly developed by LH. The plan is for the public sector to bear the risk of unsold units, while new financial support measures will be introduced to attract private sector participation.

On the 25th, LH held the "LH Private Partnership Governance Forum" at the Gyeonggi Southern Regional Headquarters in Seongnam, Gyeonggi Province, and announced its plans for Minchan projects in the second half of the year. The project sites include four districts in the Seoul metropolitan area, including the third-generation new towns, covering a total of eight blocks. The locations are Namyangju Wangsuk 2 (1,082 units), Bucheon Daejang (574 units), Incheon Gyeyang (1,216 units), and Suwon Dangsu (2,309 units). LH will bundle the eight blocks into three packages, recruit project operators next month, select them in December, apply for housing project (modification) approval in March next year, and aim to begin construction in June 2026.

Participants are attentively listening to presentations at the "LH Private Partnership Governance Forum" held by Korea Land and Housing Corporation (LH) on the 25th at the LH Gyeonggi Southern Regional Headquarters in Seongnam, Gyeonggi Province. Photo by Choi Seoyoon

Minchan is a project jointly implemented by LH and private construction companies, supplying public housing by leveraging private sector technology and brands. Previously, construction companies could choose between a "profit-sharing" and a "contract-type" model, but after the September 7 measures, Minchan will transition entirely to the contract-type model. Unlike the profit-sharing model, which divides sales profits, the contract-type only pays construction companies a construction margin.

To encourage participation from outstanding private companies, LH will introduce a "public-private financial support system for mutual growth" by the end of the year. Construction companies will be able to secure project financing at lower interest rates through payment guarantees from the Housing and Urban Guarantee Corporation (HUG). The guarantee will cover the entire shortfall in sales revenue, though the loan interest rate has not yet been determined. A pilot project will be conducted for some of the second-half public offerings.

The detailed plan for LH's direct implementation will be announced within the year through the LH Reform Committee, which is composed of external experts such as professors, researchers, and lawyers.

The event was attended by representatives from more than 60 construction companies, including Samsung C&T and Hyundai Engineering & Construction, as well as over 30 design firms. Since the government's September 7 measures did not include detailed information regarding LH's direct implementation, there was a flood of questions from attendees.

The following is a Q&A between construction companies, LH, and the Ministry of Land, Infrastructure and Transport:

- If the construction period is extended due to safety issues or strikes, is it possible to adjust the design or project cost?

▲ Even if the construction period is extended due to on-site strikes or safety issues, there are currently no plans to adjust the project cost according to existing guidelines. This is because on-site management and safety management are the responsibility of the private operator. However, if an unpredictable external factor such as COVID-19 occurs, adjustments may be made in accordance with government-level measures.

- If there is a large number of unsold units in less profitable land parcels, is there a plan for construction companies to assume responsibility or recover funds?

▲ For this public offering, which is a contract-type private participation project, LH assumes responsibility for unsold units. However, if unsold units occur, the amount of sales revenue decreases, increasing the scale of financing required, and this burden is transferred to the private operator. While LH reduces this burden through interest payments and financial products with HUG, it is inevitable that the financing burden for private operators will increase in the event of unsold units.

- Given LH's financial burden, are there concerns about reducing the volume or construction costs in direct implementation?

▲ LH plans to continue increasing the volume of Minchan projects. Direct implementation increases the burden because funds cannot be recovered immediately as with land sales, but it allows for the expansion of public housing by attracting private capital. LH will also reduce the interest rate gap between construction companies of varying credit ratings through its guarantees. There will be no reduction in unit construction costs or project volume.

- If the volume of Minchan projects increases, could there be renewed demands for the use of government-supplied materials such as ready-mixed concrete or for separate contracts for electrical and telecommunications work?

▲ We are also considering this issue. As Minchan volume increases, the volume of projects under the comprehensive evaluation system decreases, which in turn reduces opportunities for small material suppliers and the electrical and fire protection industries. Measures to protect these industries need to be developed in consultation with the government. While policy will follow the government's direction, this is a sensitive issue directly affecting the management of these industries, so we are approaching it cautiously.

- Will the new HUG financial support measures be retroactively applied to previous projects?

▲ We will sign an agreement with HUG next month to apply the new financial product for the first time. There have been suggestions to retroactively apply it to projects that have already selected operators this year but have not yet started construction, and we believe this is a good idea. Since the intent is to reduce the financing burden and invest more in quality, we will actively discuss the possibility of retroactive application.

- What is the required equity ratio and recovery timing for private operators? If financial institutions require land collateral, does LH plan to provide third-party information?

▲ There is no set standard for the equity ratio. The obligation to secure financing lies with the private operator, and when down payments and interim payments are received from sales, the private operator recovers its construction costs first. For each monthly progress payment request, if the sales revenue is sufficient, the full amount is paid; if not, the private operator covers the shortfall, and LH pays interest upon final settlement at project completion. Typically, the shortfall does not exceed 30% of the total project cost. Recovery occurs at each monthly progress payment, and no land collateral is provided.

- If there is a construction cost shortfall for the construction company, can LH adjust its interest rate compensation to match the higher private financing rates?

▲ Private operators have varying financing rates, ranging from 5% to 9-10%, so it is difficult to guarantee all rates. Currently, the standard is set at about 2.9%, which is the A- level corporate bond rate. Since there is a significant gap with private financing rates, we are preparing financial products to narrow this difference. The final rate will be determined and announced after signing an MOU with HUG in October.

- There are concerns that, after completion, construction companies may bear the burden of delayed interest due to an unclear settlement period when LH purchases the completed units.

▲ In the past, under the profit-sharing model, settlement could be delayed if unsold units remained. However, this is not an issue with the contract-type model. After completion and occupancy, project costs are settled within three months according to the agreement, so there is no concern about delays.

- When it comes to apartment brand quality, it is usually associated with large companies. Are there measures to encourage participation from small and medium-sized construction companies or design firms?

▲ There is no separate announcement for design. The private operator, which is the construction company, selects the design firm to participate together. Consortia usually consist of three or four companies, including the lead company, and on average, three or four design firms participate as well. We will consider ways to encourage participation from small and medium-sized construction companies and material suppliers. There may be differing opinions due to varying interests, but we will gather diverse perspectives to find practical solutions.

- Are there measures to facilitate the entry of new companies? Are options such as supplying individual parcels instead of packages or restricting project rights being considered?

▲ Minchan is not simply about construction but involves supplying and managing the brand and after-sales service, so management capability is important. We agree that not only large companies but also small and medium-sized construction companies should be able to participate under their own brands. We hope they will develop their proposal writing and quality management capabilities. We are aware that the package method can be a limitation for small companies, and we are considering adjusting the package structure and enabling small companies to participate as lead operators in line with next year's increased volume.

- Please adjust the evaluation criteria and scoring to encourage active participation by new companies. The individual parcel offering method could provide more opportunities than the package system.

▲ Currently, new participants receive up to three additional points for their first participation. We will consider this further and actively review it. As the volume increases to 35,000 units this year and over 40,000 units in the future, we will diversify package structures to enable participation by small and medium-sized construction companies. However, since Minchan is a project where design and proposal capabilities are more important than simple price competition, those wishing to participate will need to further strengthen their brand management and proposal skills.

- While the Minchan evaluation system is divided into quantitative and non-quantitative assessments, there are concerns about a lack of fairness and transparency. What are the improvement plans?

▲ Minchan is conducted through a public offering, not simple price or management performance competition as in the comprehensive evaluation system. Project plans are evaluated on non-quantitative criteria by a review committee composed of 15 external experts, while management status and project execution capability are scored quantitatively. Last year, there was almost no competition, but this year, nearly half of the projects are competitive. As financial support expands, more companies will participate and competition will increase. However, we are also considering how to ensure fairness, as excessive competition could lead to unclear outcomes.

- The application of the Minchan price indexation system is being delayed due to differences in standards and definitions. What are the improvement measures?

▲ Following the Ministry of Land, Infrastructure and Transport's 2023 guideline revision, LH was the first public corporation to introduce the price indexation system. We have already retroactively applied and paid 11.4 billion won, and are working to address any ambiguities. We are aware of the issue where discrepancies between the start of construction and the sales period can be disadvantageous, and will make reasonable decisions through consultative bodies. Differences in interpreting land availability requirements and construction approval timing remain, but we will clarify these through agreement revisions and reflect any price increases that occur before actual construction in the project cost.

- In many cases, the start of land use is delayed for several years after the agreement. While the government aims for rapid construction, does LH have internal guidelines?

▲ In the past, managing up to the project approval stage meant it could take more than three to four years to actually start construction. However, after the September 7 measures, all targets have been unified based on the construction start date. From now on, starting construction will directly lead to supply. LH is also improving compensation and permitting procedures to advance land availability and accelerate supply. The public offerings for the second half of this year also aim to start construction in June next year, so unnecessary delays will be minimized.

- Can the private operator's interim loan work be limited to brokerage, rather than requiring a joint guarantee in the agreement?

▲ For the contract-type model, we believe brokerage alone is sufficient. The previous profit-sharing model required an agreement because sales promotion was directly linked to profits, but the contract-type model has a different structure. However, since sales and marketing are carried out under the private brand, the private operator must play an active role. While we will consider revising it to brokerage, the private sector's responsibility and effort to ensure smooth sales are also necessary.