The Korea Land and Housing Corporation (LH) will lower the arrears interest rate applied to construction companies that have received land but are unable to pay. With the prolonged downturn in the real estate market increasing the risk of bankruptcy for construction companies, LH decided to ease the burden on these companies by reducing the arrears interest rate on land payments.
According to the National Assembly and LH on the 14th, LH reported to the National Assembly its plan to reduce the arrears interest rate on land payments to lessen the burden on private construction companies. The current arrears interest rate for land payments is 8.5%. It is reported that the extent of the reduction in the arrears interest rate for land payments in 2023 is likely to be around 1 percentage point.
LH's decision to lower the arrears interest rate on land payments aims to relieve the burden on construction companies that are struggling to repay land payments due to the downturn in the construction market.
An LH official noted, "There is a plan to reduce the arrears interest rate on land payments, but the extent of the reduction must be determined through management review, which is scheduled to occur next week." The official added, "This is a decision aimed at reducing the burden on private construction companies."
Since the concerns over the poor performance of real estate project financing (PF) began in late 2022, the number of construction companies that have received land for multifamily housing from LH and are unable to repay has rapidly increased. Originally, the multifamily housing plots supplied by LH could generate hundreds of millions of won in profits at the time of being sold to construction companies during the real estate boom, leading to fierce competition. However, as the real estate market deteriorated, construction companies have been unable to make interim and final payments.
The scale of arrears in land payments by LH reached 6 trillion won in the first half of last year. Considering that the stagnation in the real estate market persists, it is highly likely that the scale of arrears will continue to increase. The scale of arrears for land payments rose from 2.0689 trillion won in 2021 to 3.855 trillion won in 2022, and then surged to 6.9281 trillion won in 2023.
The significant increase in the scale of arrears for land payments is due to construction companies acquiring land from LH to build dwellings but lacking the capacity to pay for the land as the construction market has not recovered. Even if they try to execute PF loans to pay for the land, the burden of obtaining loans at around 10% interest rates is heavy for construction companies. Additionally, with the sales market also stagnating, there are not many construction companies willing to push for financing to proceed with their projects under circumstances expecting low profitability.
LH expects that if it reduces the arrears interest on land payments, it will help improve the liquidity of construction companies, potentially leading to a supply of dwellings as the real estate market recovers.
This could positively impact LH's financial structure in the long term. Although the lowering of the arrears interest rate will reduce the interest LH can receive in the short term, the likelihood of construction companies repaying the arrears will increase if they are able to engage in the housing supply business. LH has been under warning regarding its financial health since 2023 due to the growing scale of arrears in land payments.
In addition, LH plans to implement 21.6 trillion won, approximately 33% of the public institution investment of 66 trillion won, to support the recovery of the construction market. This amount is 3.2 trillion won more than the previous year. Notably, 57% of the investment, which is 12.3 trillion won, will be executed in the first half of this year. Furthermore, the plan includes introducing aggressive sales methods such as auctions for land that has not been sold for over 10 years and expanding agreements for the use of unsold land to resolve issues related to unsold land.