The ripple effect of PF load defaults

Last month, Neovalue, a leading real estate development firm in Korea, initiated a significant downsizing, laying off approximately 40 of its 70 executives and employees. The decision was prompted by a downturn in the real estate market, resulting in a surplus of unsold units at major project financing (PF) sites and exacerbating financial challenges for the company. The market sees this development as an ominous sign, potentially indicating a broader real estate crisis stemming from PF issues. There is growing concern over the possibility of a ripple effect, impacting not only construction firms responsible for ongoing projects but also financial institutions that provided loans. The total balance of real estate PF loans within the financial sector surpassed 135 trillion won by the end of last year.

According to NICE Credit Rating on Sunday, the anticipated losses stemming from project financing (PF) loans within non-banking financial institutions, including savings banks, securities firms, and capital entities, are projected to escalate to approximately 13.8 trillion won. This estimate is based on a conservative outlook, assuming that the final successful bid price to appraised value ratio in the auction market will fall within the bottom 25%. Broken down by sector, the expected losses amount to 5 trillion won for capital firms, 4.8 trillion won for savings banks, and 4 trillion won for securities companies. Notably, savings banks hold the largest PF loan balance within the financial industry, standing at 22.1 trillion won as of the end of last year.

If a project financing (PF) site collapses, the repercussions will extend beyond the developer with a vested interest. The impact will cascade through to the construction company, which typically guarantees payment when the developer borrows funds from the financial sector. Ultimately, the financial sector itself will also face a series of significant setbacks.

A sense of crisis is escalating within the real estate market, particularly due to the mounting count of "unsold properties after completion," particularly noticeable in local project financing (PF) sites. From January to April this year, 187 general construction companies have reported closures. This marks the highest number recorded since 2011, following the financial crisis.

The government has implemented measures to address the issue, including acquiring land for project financing (PF) business sites through corporate restructuring real estate investment trusts (CR REITs) or the Korea Land and Housing Corporation (LH). However, these efforts are still deemed inadequate. Last month, for example, the number of applications from construction companies for LH's 2 trillion won land purchase project amounted to only 2.7% of the total project.

Experts emphasize the necessity of implementing measures to address both the financial liquidity crisis at construction sites and the orderly exit of insolvent businesses. "Special measures must be implemented to tackle the issue of malicious unsold housing to prevent the entire market from shaking at once,” said Kwon Dae-jung, a professor at Sogang University's Graduate School of Real Estate. “It is urgent to revise laws related to measures such as excluding local unsold houses from the number of houses in taxation standards."


김형민기자 kalssam35@donga.com