Financial authorities have revised regulations to strengthen the soundness of real estate trust companies engaged in land trust projects. From now on, all entities that have an obligation for responsible completion, regardless of the type of land trust, will be reflected in the calculation of the Net Capital Ratio (NCR). The limit for land trust risk will also be restricted to within 100% of equity.
The Financial Services Commission announced that the amendment to the financial investment business regulations containing this content was passed on the 25th at the Financial Services Commission and will go into effect on the 1st of next month. The land trust business involves real estate trust companies receiving land in trust and constructing and distributing revenues from projects such as dwellings and commercial facilities.
First, the financial authorities expanded the scope of NCR application to reflect the actual risks of responsible completion land trusts (where the trustee bears the obligation in case of non-compliance by the contractor) and improved the calculation standards. NCR is an indicator of the financial soundness of real estate trust companies, and is generally considered risky if it falls below 150%.
Land trusts are divided into management-type (trustor) and borrowing-type (trustee) based on the borrowing entity. Additionally, management-type is further categorized into responsible completion type and general management type. However, recently, many hybrid types have emerged that combine borrowing-type with responsible completion commitments.
Until now, the reflection of NCR risk amounts regarding the responsible completion obligations of real estate trust companies has been limited to responsible completion management-type land trusts. In cases where a borrowing-type land trust incorporates responsible completion commitments, it has been excluded from the NCR risk calculation. The authorities have sought to improve this by ensuring that the credit risk is reflected regardless of the type of land trust, when real estate trust companies have a responsible completion obligation.
The government has also revised the implementation rules of financial investment business regulations to improve the standards for calculating the credit risk of real estate trust companies. The credit risk of trading partners, such as trustors and contractors, will be reasonably reflected, and the risk values will be differentially applied considering disparities in construction progress rate by business sites. If the standards of the Korea Financial Investment Association are complied with, the risk values may be partially reduced. The changed standards will be applied to new contracts from July 1.
The Financial Services Commission decided to introduce limits on land trust risk amounts in proportion to equity so that business contracts are made within the capability of real estate trust companies. Until now, there has been no separate limit regulation for land trusts of real estate trust companies, which has limited the ability to pre-check and prevent whether the land trust business is being operated soundly within the management capacity of the trust companies.
In this regard, the government plans to establish a limit that restricts the total expected risk of land trusts to within 100% of equity, while providing a sufficient preparation period, gradually applying the limits to 150% by the end of 2025, 120% by the end of 2026, and 100% by the end of 2027.
Meanwhile, the authorities have prepared special provisions in the implementation rules so that if the housing and urban guarantee corporation (HUG) loans meet certain conditions, those loans will not affect the NCR of real estate trust companies or the limits for land trust risk. The certain conditions include limiting the trust company's responsibility for borrowed funds to the trust property, thus not recognized as borrowing funds according to accounting standards, and applying when the state or public institutions provide loans or guarantees.
The Financial Services Commission expects that through this institutional improvement, real estate trust companies will operate land trusts more responsibly and ultimately contribute to the protection of interests of consumers and the stable supply of real estate. A Financial Services Commission official noted, 'We will continuously monitor whether the improvements are being properly implemented on the ground and the soundness of real estate trust companies.'