Housing and Development Industry: "Agree with Expanding Real Estate PF Equity, but Criteria Need Refinement" [Real Estate AtoZ]

Positive Assessment of Phased Implementation and Willingness to Communicate
Call for Realistic Standards in Equity Valuation
"Large Credit Exposure Regulations Should Reflect PF Characteristics"

The Korea Housing Builders Association and the Korea Developer Association stated on December 23 that while they agree with the policy objectives of the government's "Real Estate Project Financing (PF) System Improvement Plan," they believe that further refinement of the detailed criteria is necessary.

The main focus of the government's recent revision is the equity ratio of project developers. Until now, real estate development projects have typically been carried out with developers investing very little of their own capital and relying mostly on borrowed funds. Currently, the average equity ratio of domestic developers stands at around 3%. While developers have been able to generate large profits with minimal capital, the risk of business failure has been passed on to financial institutions and other lenders. To address this, the government has decided to raise the standard so that loans can only be obtained if the developer maintains an equity ratio of 20%. However, to minimize market shock, this requirement will be phased in gradually over four years, starting with a one-year preparation period and then increasing from 5% in 2027 to 10%, 15%, and finally 20%.

The development industry welcomed the phased implementation and the principle of applying the new rules only to newly issued loans. However, they raised objections to the method of assessing equity capital. The government plan only recognizes the amount initially invested by the developer as equity. In contrast, the industry argues that the value of capital changes as the project progresses.

For example, after purchasing land, if the developer obtains permits-which are a key risk in development projects-the value of the land increases. The industry is requesting that this increased value be recognized as equity capital. The associations stated, "External capital can only be attracted if investors who inject capital during the initial high-risk stage are guaranteed corresponding returns," adding, "This will enable the formation of an advanced PF market based on project viability assessments, rather than relying solely on collateral."

Concerns were also raised about the criteria for calculating the same borrower under large credit exposure regulations. Typically, developers establish a separate corporation (PFV) for each project. The basic principle of PF is to keep individual projects separate so that even if the parent company fails, the projects remain unaffected. However, the industry is concerned that if the government regulates multiple PFVs of a single developer as one entity, this principle could be undermined. The industry requested, "Please clarify the standards for recognizing the independence of each PFV."

The industry also expressed concern that the trend toward tighter regulations may be preemptively reflected by financial institutions, resulting in normal business sites being unable to secure loans. An association official said, "It must be clearly communicated to the market that the policy objective is not market contraction but modernization," adding, "A balance between supply and financial policies is needed so that sustainable housing and real estate supply can contribute to national economic stability and the well-being of the people."