The Korea Herald


S. Korea scrambles to prevent real estate PF liquidity crisis

By Jung Min-kyung

Published : Oct. 25, 2022 - 16:05

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A man passes by a reconstruction site in eastern Seoul (Herald Corp.) A man passes by a reconstruction site in eastern Seoul (Herald Corp.)
South Korean authorities are trying to contain a possible liquidity crunch from an overheated real estate project financing market, with Legoland Korea’s debt payment default rising adding to perceived risk levels.

The total value of loans extended for the purpose of real estate project financing has rapidly grown, but the central bank’s aggressive rate hikes have increased borrowers’ debt repayment burdens. The rising costs of raw materials added to the worries.

Finance Minister Choo Kyung-ho on Sunday pledged to “actively deal with the anxiety in the real estate project financing market,” in an emergency meeting of economic officials.

Choo’s remarks are in line with the latest Bank of Korea data released by a lawmaker here, showing that the overall project financing loans extended to borrowers tripled in the past decade. It grew from 37.5 trillion won ($26.1 billion) as of end-2012 to 112.3 trillion won as of end-June.

Insurers were the most active lenders, extending a total 43.3 trillion won as of end-June, increasing nearly tenfold from the end of 2012. Banks extended a total 28.3 trillion won as of end-June, only gaining 3.8 trillion won over the same period.

But compared with brokerages, insurers' real estate project financing loan delinquency rate is noticeably lower. The rate was 0.33 percent at the end of June, up 0.02 percentage point from end-March, according to data from the watchdog Financial Supervisory Service. The corresponding figure for brokerages grew 1 percentage point to 4.7 percent on-quarter as of end-March, separate FSS data showed.

Observers said the loan delinquency rate could lead to a credit crunch or widespread defaults as the central bank tightens monetary policy and the real estate market stalls.

“A liquidity crunch in the real estate project financing market is usually a mix of a frozen real estate market, an increase in unsold houses and liquidity crunch among developers,” Park Se-ra, an analyst at Shinyoung Securities, said.

“What’s scary about the latest crisis is that the project financing market is facing a liquidity crisis due to an overall market crunch. It could explode depending on the number of unsold houses or buildings from now on,” she added.

The nation’s real estate project financing market was rattled after the local developer that built the Legoland theme park in the eastern province of Gangwon declared it had defaulted on 205 billion won in overdue payments.

The top-rated short-term paper was backed by Gangwon Province, which did not follow through on its guarantee. The theme park was built in partnership with UK-based attractions operator Merlin Entertainments and opened in May.