Korea Land and Housing Corporation (LH), which has been consistently criticized for its enormous development profit, has recently expanded its public role amid a downturn in the real estate market, revealing a decline in financial soundness. An internal analysis indicated that the 'cross-financing system' used to compensate for non-revenue projects such as supplying rental dwellings has reached its limits. As the construction market has stagnated, LH is increasing its public role through expanding the supply of public housing and directly purchasing unsold apartments in regions.
According to LH on the 24th, the Korea Land and Housing Research Institute affiliated with LH recently shared an internal report titled 'Structure of development profit generation and the performance and limits of the cross-financing system.' The report analyzed, 'LH is carrying out public policy projects through a cross-financing system between revenue and non-revenue, and while the structure generating profits in the land and dwelling sector maintains the system of cross-financing, the recent sustainability of this cross-financing system has reached its limits.'
LH is structured to cover operational losses of rental dwellings with profits obtained from selling assets such as land and dwellings, paying administrative expenses and interest, and generating net income. This is what is called a 'cross-financing system.'
In this cross-financing system, LH is experiencing a decline in financial soundness while carrying out public projects, such as public rental housing. LH has been consistently criticized for needing to return the enormous development profits obtained from developing sites such as the Su-bang-sa site to the local community. However, as these profits are invested in non-revenue projects, LH has already exceeded a debt ratio of 200%, which is trending to increase by an average of 8% annually.
Recently, predictions have emerged that this cross-financing system could collapse as LH's role in implementing housing stability policies increases. LH is expanding its public role to respond to the downturn in the construction market and the crisis of real estate project financing (PF). To prevent a gap in housing supply by private construction firms, LH is increasing public housing supply and actively proceeding with the purchase and rental housing business. Furthermore, it is also purchasing unsold dwellings in local areas directly to support private construction firms.
Although spending for government policy projects has increased, the revenue obtained from the sale of existing land and dwellings has decreased. As private construction firms reduce development projects, land sales have stagnated. Additionally, rising construction and financial costs have led to a decrease in profits from development projects. The Land and Housing Research Institute conducted scenario analyses (stress tests) to review the sustainability of the cross-financing system in light of fluctuations in the real estate market, finding that losses increase according to adjustments in recovery rates for saleable land and dwellings.
The report stated, 'Since last year, with the execution of housing stabilization policies and the expansion of housing supply, the existing investment-recovery system has deviated from its balance, and the recovery capacity compared to investment has sharply decreased,' adding that 'recent increases in construction costs and the sluggishness of private construction projects have resulted in delays in the collection of payments for lands supplied by LH. The poor recovery performance compared to the planned supply could negatively impact long-term profit generation.'
To drive government policy projects like LH is doing now, the Research Institute argues that adjustments in project quantity, diversification of projects, and financial support from the government are necessary. The report emphasized that 'if the downturn in the real estate market persists for a long time, the potential for profit in revenue projects for compensating non-revenue projects such as rental dwellings will diminish, leading to weakened improvement capabilities in project finances and expected disruptions in policy projects.' It also stated that 'expansion of government compensation for the construction and purchase of rental dwellings and increased financial support for maintenance costs are necessary.'