On July 31, 2024, Byoung Hwan Kim, the new Chairman of the Financial Services Commission (the “FSC”), emphasized the importance of “market stability” and vowed to address risks such as issues involving real estate project financing (“PF”).
On August 29, 2024, the FSC held the “Fourth Meeting for the Soft Landing of Real Estate PF” with relevant authorities, including the Financial Supervisory Service (the “FSS”), the Ministry of Economy and Finance, and the Ministry of Land, Infrastructure and Transport, and released the “Financial Companies’ Feasibility Study Results and Plans for Real Estate PF.”
The press release applied the revised “Feasibility Study Standards” to projects that were at risk of failing as of the end of June 2024, and found that real estate PF projects were going through a “soft landing” phase within the range that regulators deemed predictable and manageable.
The FSC announced that they will review financial companies’ plans for restructuring/reorganizing real estate PF projects and conduct ongoing assessments. The FSC’s assessments and future plans are expected to have a significant impact on the real estate PF market and its participants, including banks. The key points are set forth below.
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Initial Feasibility Study Results and Impact on Financial Companies
Through the initial feasibility study, the FSC aimed to separate the “wheat” (i.e., projects with no particular issue) from the “chaff” (i.e., projects that are at risk of failing), and thereby substantially reduce the risks and uncertainties arising from the PF market.
According to the initial feasibility study, loans classified as “cautionary” and “non-performing” amounted to KRW 21 trillion, or about 9.7% of the total PF exposure[1] (KRW 216.5 trillion). The PF loans provided to projects under construction amounted to merely KRW 4.1 trillion, and therefore the study found that the impact on construction companies would probably be limited. Further, as most developers (93.1%) were only exposed to one “cautionary” or “non-performing” project, the risk of one failing project having a ripple effect on other projects also appeared to be low.
However, given that the percentage of PF loans classified as sub-standard loans has slightly increased by 6.1% compared to the previous year end, the FSC stated that financial companies would have to actively liquidate non-performing loans and manage delinquency rates.
On the other hand, the FSC noted that the delinquency rates of PF loans and land mortgage loans decreased significantly by the end of June 2024, as compared to delinquency rates at the end of March 2024. If restructuring/reorganizing plans for “cautionary” and “non-performing” projects are implemented in accordance with remedial plans that are being prepared by financial companies, the FSC also expects the financial soundness of financial companies to improve even further in the second half of the year.
Many market participants, including financial holding companies, banks and insurance companies, are providing financing to support the soft landing of real estate PF projects, and the first syndicated loan by banks and insurance companies was provided on September 2, 2024.
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Assessing Plans for Restructuring/Reorganizing of PF Loans
Once a financial company finalizes its restructuring/reorganizing plans (by September 6, 2024), the FSC will assess its implementation on a monthly basis from September 2024. The FSC announced its plan to support projects that were “sound” (that is, financially healthy or normal) by facilitating loan maturity extensions and other financial support, to ensure that the projects can be carried out smoothly.
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Ongoing Project Evaluation
The FSC plans to conduct a feasibility study for all projects (including those excluded from the initial study) by November, based on their performance as of the end of September. Furthermore, from December 2024, regulators will implement an ongoing evaluation system through which they will regularly assess all projects every quarter. After the end of each quarter, the FSC will finalize their assessment of each project’s feasibility within a month and will finalize a restructuring/reorganizing plan within the following two months.
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Given the new FSC Chairman’s determination to address the risks of real estate PF and the recent regulatory guidance, the primary participants in the real estate PF market, such as banks and other financial institutions, will need to take into account the FSC’s assessments and the future regulatory approach when determining their mid to long-term business plans.
As the FSC has announced plans to actively support the financing of sound projects, financial companies will need to carefully study the feasibility of each project before providing loans and will also need to work on managing their financial soundness by strengthening their ability to absorb losses arising from failing projects. Furthermore, a quarterly feasibility study and restructuring/reorganizing plan are scheduled for all projects during the fourth quarter of 2024.
[1] Exposure: Proportion or amount of risk that may be incurred as a result of real estate PF investment.
[Korean Version]
