As the domestic project financing (PF) market experiences a downturn, Korea Investment Real Estate Trust (Korea Investment Trust) is developing a new trust product to enhance the stability of PF projects.
This product is structured so that even if a business site has poor sales performance under the ‘sales-rate’ condition, 90% of the construction costs will be covered by the trust company.
According to the real estate finance industry on the 18th, Korea Investment Trust is considering applying a trust product that provides 90% of the total construction costs in case sales do not proceed smoothly for construction companies at domestic business sites under sales-rate conditions.
This product features a hybrid structure that combines 'managed land trust' (managed trust) and 'borrowed-type (development-type) land trust' (borrowed trust).
Until the sales are made, the trust will play the role of a managed trust overseeing the business site while procuring project funds through PF loans. After the sales, if sales rates are low and securing construction payments becomes difficult, the trust will fulfill the role of a borrowed trust by providing up to 90% of the total construction costs to the construction company.
This product differs from the 'responsibility completion guaranteed managed land trust' (responsibility trust) that many domestic trusts have been awarded, as the trust company has no obligation regarding completion, and it only assumes responsibility for part of the construction costs when sales do not materialize.
However, construction companies will have subordinate rights to the remaining 10% of construction costs, excluding the 90% provided by the trust if sales do not reach 100%. Only upon completing sales at 100% will the construction company be able to receive the total construction costs. Korea Investment Trust plans to set different trust fees based on the risks associated with each business site.
A Korea Investment Trust official noted, “From the perspective of the trust company, if sales are not proceeding smoothly, they must bear the risk of having to inject funds. Therefore, we are considering applying the new trust product focusing on business sites with high sales potential and large construction companies.” The official added, “Large construction companies not only have outstanding construction capabilities, but they also possess well-known housing brands, which gives them an advantage in sales.”