Hyundai Engineering is increasingly likely to take on a project financing (PF) contingent liability exceeding 700 billion won due to challenges faced in developing the Knowledge Industry Complex in Goyang City. As the feasibility of developing the Knowledge Industry Complex, caught in a state of oversupply, declines, this project in the bridge loan phase finds it difficult to transition to the main PF. With the likelihood of the project failing increasing, Hyundai Engineering, which is providing joint guarantees to the implementing company, has already made an internal decision to proceed with compensation.
The bridge loan refers to a short-term loan that the implementing company raises to finance land costs or other permit-related expenses during the early stages of development projects.
According to Hyundai Engineering on the 17th, the company approved the decision for compensation regarding the bridge loan for the Goyang Janghang Business District (2BL) Knowledge Industry Complex at a board meeting held at the end of April. The Knowledge Industry Complex is a collective construction building that is built to house offices or small factories for small and venture companies, with more than three floors.
The troubled site is the Knowledge Industry Complex in the Goyang Janghang Business District, where Hyundai Engineering is participating as the constructor. The implementing company is NH D Holdings. Hyundai Engineering is providing a joint guarantee of up to 84.1 billion won to NH D Holdings. At the end of the first quarter of this year, NH D Holdings borrowed 76.5 billion won via a bridge loan. The due date for this loan is on the 27th of this month.
Although only ten days remain until the loan's due date, the direction of the project has yet to be determined. A representative from Hyundai Engineering noted, 'We are still discussing how to proceed with the project with the implementing company,' adding, 'We are not considering changes in usage and are adjusting the project direction.' The representative also mentioned, 'We have not yet reached the stage where compensation has been executed.'
If the Goyang Janghang Knowledge Industry Complex development project does not transition to the main PF, the implementing company will either extend the bridge loan or repay the loan amount. Since the financial sector generally prefers to settle PF projects with low feasibility, it is more likely that the loan will need to be repaid rather than extending the bridge loan. If the implementing company fails to repay the loan, Hyundai Engineering, which provided credit enhancement, will have to pay it instead.
Hyundai Engineering's proactive decision to proceed with compensation indicates that it internally regards the possibility of transitioning this project to the main PF as low. Given the significant expansion of unsold units in the Knowledge Industry Complex, there is a high likelihood of incurring losses even if the development project is completed.
The Knowledge Industry Complex, which had active transactions until 2022, has seen a rapid decline in demand due to oversupply and economic recession. According to RealtyPlanet, the transaction volume for Knowledge Industry Complexes across the country in the first quarter of this year was 552, a decrease of 45.3% compared to the same period last year. The transaction amount also fell by 50.3% to 218.4 billion won.
In particular, in the case of the Goyang Janghang Knowledge Industry Complex development project, the acquisition of land was made during a real estate boom, resulting in high land acquisition costs. The acquisition cost per pyeong (3.3㎡) is in the 80 million won range. Considering increases in construction and financial costs, the development expenses for the Knowledge Industry Complex could rise, leading to larger potential losses for the developer.
Even if Hyundai Engineering proceeds with the compensation for this loan, the actual impact is expected to be minimal. Hyundai Engineering preemptively reflected the PF contingent liabilities related to this project in its finances last year. A representative from Hyundai Engineering stated, 'We anticipated a negative scenario for this project and reflected it in last year's results in advance,' adding, 'The board approved the (compensation) proposal considering this aspect.'