As the financial sector continues to clean up bad debts in real estate project financing (PF), soundness has improved, with the arrears rate falling into the 3% range. The financial authorities are closely watching additional risks as uncertainties grow, including rising construction costs due to the Middle East situation.
The Financial Services Commission said on Apr. 5 that it held a "real estate PF situation review meeting" at Government Complex Seoul on the 3rd to review trends in PF arrears rates, business feasibility evaluation results, and plans to implement system improvements. As of the end of last year, the financial sector PF loan arrears rate was 3.88%, down 0.36 percentage point (p) from the previous quarter.
Since rising to 4.49% in Mar. last year, the PF arrears rate has continued to decline through 4.39% in Jun. and 4.24% in Sep. The arrears rate on land-backed loans at smaller financial companies such as savings banks, specialized credit finance companies, and mutual finance institutions also fell 2.75 percentage points from the previous quarter to 29.68%.
PF exposure (risk-weighted assets) was 174.3 trillion won, down 3.6 trillion won from the previous quarter. This reflects that more projects were completed and resolved or restructured than newly originated. The cleanup of distressed PF business sites is also gaining speed. By the end of last year, a total of 18.5 trillion won among business sites that received caution (C) or concern for insolvency (D) grades in PF business feasibility evaluations had been resolved or restructured.
Of that, resolutions accounted for 13.3 trillion won (72%) and restructurings 5.2 trillion won (28%). As a result, the size of distressed (C·D grade) PF has declined for three consecutive quarters to 14.7 trillion won, and its share of total exposure has fallen to 8.4%. However, the financial sector and the construction industry suggested that PF project uncertainties are growing due to the recent Middle East situation, including rising construction costs and instability in raw material supplies.
The financial authorities plan to push ahead without delay with improvements to the PF soundness framework alongside the cleanup of distressed business sites. Within this year, they will prepare maintenance plans for sector-specific supervisory regulations, enforcement rules, and model standards, and starting next year, a plan to gradually raise the equity-to-project cost ratio for PF to as high as 20% is set to be implemented.