The government is set to implement regulations to lower the land trust handling limit for trust companies starting in July to strengthen their financial soundness, raising concerns among residents of complexes that had been considering or pursuing reconstruction projects through the trust method that their developments might be halted.
The Mokdong 7 Complex in Yangcheon-gu, Seoul, changed its project from a trust-based reconstruction to a cooperative method, while Mokdong 6 Complex opted to establish a cooperative directly instead of using the trust method.
According to the maintenance industry on the 23rd, among the apartments in the Mokdong new city of Yangcheon-gu, Seoul, Mokdong 6 and 7, which had pursued the project through the trust method, have switched to the cooperative method.
Mokdong 6, which had been considering trust-based reconstruction, will hold a general meeting to establish its cooperative on the 10th of next month, utilizing the direct cooperative establishment system. Mokdong 7 signed a memorandum of understanding (MOU) with Koramco Asset Trust in October 2023, but after a vote by owners in February of this year, it changed from the trust method to the cooperative method.
The trust-based maintenance projects were highly popular, receiving interest from eight of the 14 complexes in the Mokdong new city of Seoul. Currently, those that have completed the selection of preliminary trust companies in Mokdong new city include ▲ Complex 1 (Our Asset Trust, Shinhan Asset Trust) ▲ Complex 2 (Hana Asset Trust) ▲ Complex 5 (Hana Asset Trust) ▲ Complex 9 (Korea Asset In Trust) ▲ Complex 10 (KOREIT) ▲ Complex 11 (Korea Asset In Trust) ▲ Complex 13 (Daishin Asset Trust) ▲ Complex 14 (KB Real Estate Trust).
However, as the Financial Services Commission (FSC) announced an administrative notice to implement the 'revised trust business supervision regulations' that will limit trust companies' land trust handling limit (expected risk amount) to within 100% of their equity starting July 1, concerns about the capabilities of trust companies in pursuing maintenance projects began to arise.
A member of a cooperative promoting reconstruction in Mokdong, referred to as A, noted, "Recently, rumors of some trust companies going bankrupt have circulated, indicating that their financial soundness has deteriorated significantly, so there are worries that if we hastily proceed with trust-based reconstruction, the worsening liquidity of trust companies could halt the project. The opinion is growing that given the numerous reconstruction projects already secured by trust companies, it would be safer to switch to a cooperative establishment method now, as the government is tightening regulations on them further."
The FSC introduced the amendment citing concerns that if the contingent liabilities of trust companies increase due to the economic downturn in the real estate sector for responsibility completion-style project financing (PF) business sites, it could lead to a deterioration of their financial soundness.
Trust companies expressed that applying the same regulations to them, even though they are responsible for lower levels of risk compared to PF businesses that must secure sites through existing bridge loans, is excessive. They also voiced concerns that in the case of maintenance projects pursued by trust companies, since the land and other properties are secured through owners from the beginning to carry out reconstruction and redevelopment, the business costs are recorded as liabilities of the trust companies, potentially leading them to be viewed as deficient trust companies.
A representative from trust company B stated, "Due to the characteristics of the trust method, where necessary business costs and relocation expenses are procured by trust companies on behalf of cooperative members with guarantees from the Housing and Urban Guarantee Corporation (HUG), once this regulation is implemented, even trust companies with substantial equity can only handle a few maintenance projects in Seoul. For trust companies with relatively low equity, it is practically telling them to withdraw from the maintenance business altogether."
A representative from trust company C remarked, "Domestic trust companies with equity of less than 1 trillion won are progressing on maintenance projects by borrowing funds through HUG or the financial sector rather than using their own funds, and this borrowing is recorded as liabilities of the trust companies. For a single reconstruction project in Mokdong alone, funding in the trillions is needed, and now, despite having already secured projects, asking them to carry out trust-based maintenance projects within 100% of their equity starting in July is excessive."
Among the 14 domestic trust companies, KOREIT, which has the largest equity capital, had a separate equity of approximately 880.5 billion won as of the end of December last year. Shinyoung Real Estate Trust (approximately 137.9 billion won), Daishin Asset Trust (approximately 148.4 billion won), Korea Trust (approximately 187.3 billion won), and Mugunghwa Trust (approximately 139.4 billion won) all had equity in the 100 billion won range.
The government has already recognized the complaints from the trust and maintenance industries and is discussing improvement measures among departments.
A representative from the Ministry of Land, Infrastructure and Transport stated, "We are in a situation where we need to stimulate housing supply through maintenance projects, so we are currently discussing various measures, including the establishment of evaluation indicators and revisions of limit amounts, through consultations between the FSC and other departments. Since the amendment has only been administratively announced and not yet implemented, discussions are ongoing about changing its content for implementation."