As the construction and real estate markets struggle to recover, defaults in real estate project financing (PF) loans are piling up. The financial sector is making strenuous efforts to normalize by writing off and selling off bad debts, but new defaults continue to emerge, increasing the overall scale of defaults.
According to the Financial Services Commission on the 3rd, the arrears rate for real estate PF loans in the first quarter of this year rose to 4.49%, an increase of 1.07 percentage points from the previous quarter. This is the highest level since the relevant figures were disclosed. The arrears rate for the securities sector also peaked at 26.14%, up 5.49 percentage points during the same period. Savings banks reported an arrears rate of 7.7%, while the specialized credit finance sector had 5.4%, and banks and insurance companies ranged between 1% and 2%.
The reason for the increase in the arrears rate is that more new defaults are occurring than bad assets are being eliminated. According to the Bank of Korea, from October of last year to March of this year, the scale of disposal and write-offs of bad PF loans amounted to 3 trillion won by savings banks and 3.2 trillion won by mutual finance, while new arrears during the same period reached 6.8 trillion won and 15.6 trillion won, respectively.
In the first quarter of this year, the financial sector restructured and reorganized business sites with a significant level of concern, amounting to 2.6 trillion won. However, during the same period, the amount of both significant and problematic loans increased by 2.7 trillion won from the previous quarter, reaching 21.9 trillion won. The arrears balance for real estate PF loans also increased by more than 1 trillion won during the same period to 5.39 trillion won.
In particular, the arrears rate for land collateral loans rose to 28.05% in the first quarter of this year. Land collateral loans are products that involve borrowing money against the land used in the early stages of real estate projects. Although there are no buildings yet, they are investments based on anticipated future value. Because there is no immediate revenue, once a default occurs, it spreads uncontrollably.
Mutual finance, which holds the largest amount of land collateral loans at 9.9 trillion won, recorded the highest fixed non-performing loan ratio in real estate PF at 26.62%. Savings banks, which hold 5.3 trillion won in land collateral loans, reported a ratio of 25.62%. Although the balance of land collateral loans reduced to 16.9 trillion won in the first quarter of this year from 18.4 trillion won in the previous quarter, the arrears balance increased by approximately 740 billion won to 4.74 trillion won during the same period.
The ongoing issues with real estate PF defaults are due to the failure of the construction and real estate sectors to recover. Construction companies have taken out loans from the financial sector but are unable to repay them because unsold properties are emerging, especially in regional areas. In particular, as banks tighten corporate loans due to rising arrears rates, construction companies have faced liquidity issues, leading to an expansion of defaults.
According to the construction industry knowledge information system, the number of general construction firms that closed last year reached 529, marking a record high. From January to May of this year, 214 firms shut down. At this rate, the number of construction firm closures this year is expected to be similar to the record-setting figures of last year.
Financial authorities will extend the temporary easing of regulations on real estate PF loans that applied to the second financial sector until the end of the year, while providing liquidity through the 5.4 trillion won prepared from the second supplementary budget for special guarantees for non-bank PF for small construction firms. The Financial Services Commission noted that "the liquidity support measures for real estate PF will help alleviate the risks faced by small construction firms."