On November 14, 2024, the government unveiled its “Plan for Improvement of Real Estate Project Financing (“PF”) Policy (the “Plan”),” a comprehensive initiative jointly developed by the Ministry of Land, Infrastructure and Transport, the Ministry of Economy and Finance and the Financial Services Commission.
The recently announced Plan was prepared in close consideration of the vulnerabilities in real estate PF, which serves as a key mechanism for supplying housing and construction projects in Korea. The low equity capital ratio of developers exposes this sector to real estate market volatility, and the insufficient systematic management of PF-related information hampers timely responses during crises.
Against this backdrop, the Plan is a strategic consideration to address the above vulnerabilities and enhance market stability. The government is proposing (i) measures to lay the foundation for stable equity capital expansion, (ii) measures to establish fair order in the market, and (iii) measures to foster developers with expertise in developing and operating real estate rather than merely focusing on sales.
The key details of the Plan are as follows.
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Establishment of a Foundation for Enhanced Equity Capital in Real Estate PF Projects
As the mid to long-term goal, to ensure a stable equity capital ratio in real estate PF projects, the government intends to introduce measures aimed at raising the equity capital ratio of real estate PF. The objective is to gradually raise the equity ratio from the current industry standard of 5% to 20% by the year 2028.
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Classification
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Purpose and Key Measures
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Establishing a stable business structure through investment in-kind
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Purpose: Considering that real estate development projects are usually vulnerable to external variables such as interest rate hikes as land is purchased with high-interest bridge loans, the government plans to develop alternative measures to increase the equity ratio by incentivizing real estate owners to make investment in kind with land and buildings (i.e., participating as shareholders).
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Key Measures:
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Amending the Act on Restriction on Special Cases Concerning Taxation to defer taxation on capital gains, considering the timing of profit realization for the investor when real estate assets are contributed as in-kind investment.
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The government will identify pilot project sites where landowners can participate through in-kind contributions, offering regulatory relief and providing administrative support such as consulting on business feasibility analysis.
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Supporting capital expansion through incentives, etc.
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The government plans to establish a basis in the Act on the Management of Real Estate Development Projects, etc. (the “Real Estate Development Projects Management Act”)[1] to secure a high equity ratio by granting urban regulatory exceptions, such as relaxation of floor area ratio and public contributions requirements for development projects that the owners continue to manage and operate after the development. This is in consideration of the fact that there is little incentive to increase capital for short-term development projects that are liquidated after completion and sale soon after the development.
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PF guarantee fee discounts for businesses with a high equity ratio.
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Amendments to banking and insurance regulations to permit financial institutions and their subsidiaries to participate in long-term rental housing operations through their subsidiaries and funds.
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Encouraging capital expansion and the financial soundness regulation system by strengthening risk management
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Amending regulations to establish differentiated capital requirements and loan loss provisioning rules across financial sectors, with risk weights and reserve levels directly tied to project equity ratios.
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Additional equity ratio requirements (a certain threshold on equity to business expenses ratio) will be considered for certain lending business sectors with limited risk management capabilities, including mutual savings banks, credit finance companies, and community credit cooperatives.
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2.
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Establishment of Fair Order in the Real Estate PF Market
The proposed improvement plan addresses three key market deficiencies: (i) limited due diligence by financial institutions due to construction and trust company guarantees reducing incentives for thorough feasibility analysis, (ii) excessive risk concentration in construction and trust companies under the rigid completion guarantee requirements, and (iii) ineffective policy responses stemming from insufficient PF information management systems. To address these issues, the following measures will be implemented:
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Classification
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Purpose and Key Measures
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Strengthening business feasibility evaluation for PF loans
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Purpose: The measures aim to address the current practice of perfunctory feasibility reviews by financial institutions, which stems from reliance on construction and trust company guarantees and the lack of credible evaluation standards.
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Key Measures: A mandatory PF feasibility assessment regime will be implemented through amending the Real Estate Development Projects Management Act, establishing certification requirements for evaluation agencies and making it mandatory for these agencies to assess the feasibility of PF businesses when lending loans.
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Improving unreasonable practices
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Purpose: The current market practice imposes excessive completion guarantee obligations on construction and trust companies under PF loan and trust agreements, which typically contain limited grounds for completion deadline extensions. This often results in guarantors bearing completion risks even in circumstances beyond their control. The reforms will address this disproportionate risk allocation while also eliminating unreasonable PF fee practices.
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Key Measures:
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A task force will be established to reform the completion guarantee system. This task force will develop comprehensive improvements including revised criteria for completion guarantee deadline extensions and clear parameters for compensation liability in cases of delayed completion.
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Separately, a task force on PF fees will establish standardized guidelines across financial sectors, implementing best practices for fee structures and calculation standards.
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Establishing integrated PF information system
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Purpose: The plan introduces an effective information management system in consideration of limitations in establishing effective policies and proactively responding to risks due to the lack of systematic management of PF-related information such as licenses/permits, loans, and sales.
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Key Measures: The plan aims to establish an integrated PF information system that regularly monitors the current status of development projects of a certain size throughout the entire stage of the project, including the status of land sales and licenses/permits, financing (financial structure) and sales progress, by enacting the Real Estate Development Projects Management Act.
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Enhanced risk management framework for real estate trust companies
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Purpose: Market concerns have emerged regarding trust companies’ contingent liabilities under completion-guaranteed land trusts, particularly the risk of such liabilities materializing during real estate market downturns. To address these concerns, the government will standardize trust companies’ scope of liability and strengthen their risk management protocols.
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Key Measures: The measures include establishing best practice standards for completion-guaranteed land trusts, revising net operating capital ratio requirements, and introducing new regulatory limits on total land trust exposure relative to equity capital.
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Fostering Korean Professional Developers with Long-term Operational Expertise
The reform measures aim to cultivate a new generation of professional developers focused on long-term development and operation, moving beyond the traditional sales-oriented business model. The following initiatives will be implemented:
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Classification
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Purpose and Key Measures
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Fostering professional developers who can develop and operate through REIT-based investment
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Providing priority to acquire well-located public housing sites to REITs with stable equity capital through the amendment of the Public Housing Business Handling Guidelines and the Housing Site Development Business Handling Guidelines, etc.
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Providing high-quality land to REITs to encourage the development of landmark commercial facilities in local areas and specialized development such as healthcare REITs.
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Establishment of professional developer certification system
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Implementing a comprehensive evaluation system, with specialized agencies designated to assess developers based on established performance metrics. These agencies will verify implementation track records and publicly disclose evaluation results.
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The system will track professional credentials, including individual project experience, career history, and continuing education requirements for developers.
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Facilitating participation of institutional investors in real estate development trust
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Purpose: It aims to prepare measures to encourage participation of institutional investors in real estate development trust in the land trust projects.
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Key Measures: To review the possibility of allowing institutional investors to invest up to a certain portion (15%) of project costs (excluding land costs) in land trust projects.
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The government is planning to implement each improvement measure as early as the second half of 2024 (such as the improvement of PF fee practices) through 2026. Implementation requires significant legislative amendments across multiple areas, including enactment and amendment to the Real Estate Development Projects Management Act, amendment to the Act on Restriction on Special Cases Concerning Taxation, other laws and regulations related to banks and insurance and detailed supervisory regulations by each financial sector, etc., will be necessary. Consequently, it is crucial to closely follow the implementation and modification of these pertinent laws and regulations.
[1] The bill was proposed on September 11, 2024, which includes a plan to collect information on the current status of real estate PF, a plan for the establishment and operation of an information system, a plan for the organization and operation of a real estate development project coordination committee, etc. As of the date of this newsletter, bill is pending before the Land, Infrastructure and Transport Committee of the National Assembly for consideration.
[Korean Version]
