Lotte Engineering & Construction is taking steps to secure liquidity by reviewing the sale of its headquarters building in Jamwon-dong, Seocho-gu, Seoul. So far, Lotte Engineering & Construction has been focusing on securing liquidity by advancing construction and sales schedules to alleviate the liquidity burden caused by the tightening in the real estate project financing (PF) market.
According to Lotte Engineering & Construction on the 26th, it recently commissioned real estate consulting firms to explore asset liquidity options, including the sale of its headquarters site. The sale of warehouse assets in the metropolitan area and equity in rental housing real estate investment trusts (REITs) is also included in the liquidity securing measures.
The headquarters building of Lotte Engineering & Construction, under review for sale, is located between apartment complexes in Jamwon-dong, Seocho-gu, Seoul. It has been used as a headquarters since 1980 and could be developed into residential facilities, prompting interest from developers and asset management firms. The real estate industry estimates the asset value of the headquarters building to be around 500 billion won.
Lotte Engineering & Construction is also reportedly reviewing the sale of its warehouse assets in the metropolitan area and equity in rental housing REITs. If Lotte Engineering & Construction sells all the assets it is considering for liquidity, it could secure about 1 trillion won in cash and reduce its liability ratio.
Lotte Engineering & Construction has been gaining recognition in the apartment and officetel market by launching its premium residential brand 'Lotte Castle'. However, after the Legoland incident in 2022, the real estate project financing (PF) market tightened, leading to investments in PF liquidity securities.
The decision to sell the headquarters building seems significantly influenced by the burden of PF contingent liabilities. According to NICE Credit Rating, as of the end of June last year, the amount of Lotte Engineering & Construction's PF contingent liabilities was 4.8945 trillion won, which is considered excessive compared to its capital buffer. In particular, PF contingent liabilities related to 'construction projects that are unstarted and have poor sales rates' amount to 2.7832 trillion won.
The financial burden on the Lotte Group itself has also had an impact. Following poor performance in one of its core sectors, retail and chemicals, the Lotte Group is pursuing major restructuring efforts that include disposing of non-core businesses and selling assets. There are analyses suggesting that there has been a decrease in the cash support capacity of subsidiaries within the group, prompting the consideration of liquidity options.
Since last year, Lotte Engineering & Construction has been working to reduce its liabilities. The asset normalization task force (TF), operational from March to the end of last year, reviewed the viability of major projects and pushed for restructuring. Although the task force concluded in the second half of last year, relevant departments continue to work on improving the financial structure.
According to the construction industry, the scale of PF contingent liabilities has reportedly been reduced to 3.1 trillion won as of November last year due to efforts such as the transition of major projects to PF and the establishment of funds for purchasing PF bonds.
Lotte Engineering & Construction is also suspending construction or increasing costs on ongoing project sites. At the Cheongdam Luel (Cheongdam Samik Apartments) reconstruction site, where a contract was signed in August 2017 for a construction cost of 3.726 billion won, a cost increase to 5.909 billion won was requested in May 2023 due to rising raw material prices. At the Ichon Luel (Ichon Hyundai Apartments) remodeling site, the company also demanded an increase in construction costs from 5.42 million won per 3.3 square meter to 9.26 million won, and when negotiations with the association did not succeed, construction was halted.
A representative from Lotte Engineering & Construction noted, "We have commissioned several consulting firms and will monitor the situation thereafter," adding, "It is merely part of efforts to reduce the liability ratio and improve the financial structure; liquidity risk has not significantly affected this decision. The sale of the headquarters building is also not confirmed yet."
Experts have diagnosed that Lotte Engineering & Construction is focusing on solidifying its foundations due to the real estate market recession. Professor Lee Jong-woo of Ajou University's Business Administration department remarked, "There are difficulties across the Lotte Group, leading to exceptional measures being implemented by each group company to solidify their foundations," adding, "Lotte Engineering & Construction also appears to be consolidating funds by disposing of properties it holds in addition to the headquarters and Lotte Mart, as the downturn in the real estate market continues without immediate improvement."