Kyobo Asset Trust classified as nonperforming a land trust project worth about 48 billion won. It is the second time in about a year since Nov. last year that a large-scale project has been classified as nonperforming.
Last year, the industry actively reflected the risk of deterioration at guaranteed-completion projects. With another nonperforming case emerging this time, concerns are rising that risks at unsettled business sites may spread again.
According to the real estate trust industry on the 15th, Kyobo Asset Trust recently classified 48.6 billion won in land trust claims as nonperforming and is said to be moving to recover the claims through sales and discounted unit sales.
This is the first time this year that Kyobo Asset Trust has classified a large land trust project as nonperforming. It comes about 10 months after nonperforming claims of 39.6 billion won and 32.9 billion won occurred in Aug. and Nov. last year, respectively. Since being incorporated as a subsidiary of Kyobo Life Insurance in 2019, Kyobo Asset Trust entered guaranteed-completion and debt-financed land trust businesses later than other trust companies and pursued aggressive sales.
In both guaranteed-completion and debt-financed land trust deals, the trust company bears responsibility if business sites deteriorate. But as the real estate downturn drags on, nonperforming business sites are popping up across the board, and the real estate trust industry is taking collateral damage.
An official at a real estate trust company said, "In particular, Kyobo Asset Trust entered guaranteed-completion and debt-financed projects late and engaged in aggressive sales, including contracting with business sites with high nonperforming risk," and added, "Because of this, it appears to have taken the biggest hit in the industry until recently."
Its results also show notable weakness. Kyobo Asset Trust's operating loss last year was 312 billion won, nearly nine times larger than the previous year's 37.5 billion won. Its credit outlook was also lowered from "A- (stable)" to "A- (negative)." In Apr., Korea Ratings revised the outlook downward, noting, "The number of guaranteed-completion business sites at Kyobo Asset Trust that failed to meet completion deadlines is increasing more than expected."
Trust account loans stood at 791.2 billion won at the end of last year, nearly double the previous year's 440.4 billion won. Guaranteed-completion projects accounted for 336.4 billion won, and debt-financed land trusts 454.8 billion won. Trust account loans are a type of lending by real estate trust companies to raise funds needed for development projects. They can generate interest revenue, but if a business site deteriorates, they must be provisioned as bad-debt allowances and recognized as a loss.
The deterioration of asset trust businesses is not unique to Kyobo Asset Trust. With the prolonged slump in the real estate market, the real estate trust industry has been clearing nonperforming business sites and building up loan-loss provisions. Large nonperforming business sites have been cleaned up to a fair extent, but many sites are still pending.
A real estate trust industry official said, "There are still several business sites that have not been settled," and added, "If management is not sustained, we judge there is a high possibility that the issue of real estate business deterioration could flare up again."