Last year, the liability ratio of real estate trust companies approached 100%. The liability ratio is a key indicator used to assess a corporation's financial soundness, calculated by dividing total liabilities by equity. A liability ratio of 100% means that there is a liability equal to the amount of equity. The 'responsible completion trust,' which ensures that if a contractor fails to complete a project on time, the trust company funds the completion, has been identified as a cause of the deterioration of trust companies.
On the 8th, NICE Credit Rating reported that, based on an analysis of the business reports of 13 real estate trust companies, including KOREIT, Korea Asset In Trust, Hana Asset Trust, and Kyobo Asset Trust, the average liability ratio of real estate trusts last year was 97.4%. This marks an increase of 41.1 percentage points from the previous year's 56.3%.
Looking at individual trust companies, Mugunghwa Trust had the highest liability ratio, rising from 80.9% the previous year to 168.1%. Mugunghwa Trust received a management improvement order from the Financial Services Commission last year due to a deterioration in financial soundness. Additionally, Korea Investment Real Estate Trust's liability ratio surged from 47.7% to 167.6% over one year, while Shinhan Asset Trust's liability ratio climbed nearly sevenfold from 22.6% to 155.2%. Other companies, such as Daeshin Asset Trust (48.6% to 149%) and Korea Land Trust (95.7% to 140.4%), also saw increases in their liability ratios. KB Real Estate Trust's liability ratio decreased compared to the previous year, but it still recorded a ratio of 129.3% as of the end of last year. Among the 13 real estate trust companies with credit ratings, six had liability ratios exceeding 100%.
An industry official said, "Trust companies have come to manage many responsible completion projects in the provinces contracted by small and medium-sized construction companies, but with large unsold units and a funding crunch, many have shouldered construction costs with their own funds or borrowed funds to meet responsible completion obligations." The official noted, "This issue has particularly spread among non-apartment projects in the provinces, such as knowledge industry centers, residential accommodation facilities, and officetels."
Responsible completion means that the contractor commits to completing the construction within a specified period, and if they fail to do so, the implementing company must bear all the loans borrowed from financial institutions. Usually, the contractor is responsible for the completion, but small and medium-sized construction companies with low credit ratings utilize trust companies to enhance their creditworthiness. If the contractor is unable to shoulder the loans, the trust company promises to take responsibility and wins the construction order.
KB Real Estate Trust's apartment development project in Haeundae, Busan, Shinhan Asset Trust's lodging facility in Sejong and officetel development project in Changwon, Gyeongnam, and Woori Asset Trust's neighborhood living facility construction project in Jeongwang-dong, Siheung, Gyeonggi Province, as well as a knowledge industry center development project in Tangjeong, Asan, Chungnam, have all deteriorated.
The reliance on borrowing funds by real estate trust companies also nearly doubled, rising from 19.5% the previous year to 34.0%. Reliance on borrowing funds refers to the proportion of borrowings sourced externally to a corporation's total assets. Furthermore, the ratio of non-performing assets classified as bad debts increased from 45.0% the previous year to 55.3%. A proportion of over 50% in non-performing assets means that more than half of the assets held by a trust company consist of bad debts.
Kim Seong-jin, Deputy Minister of NICE Credit Rating, noted, "Due to rising construction and project costs and the spread of unsold units, many small and medium-sized construction companies in the provinces faced bankruptcy last year, and trust companies' financial soundness has significantly worsened as they absorb the responsibility for completion obligations." He added, "Many trust companies are experiencing lawsuits for damages due to failing to meet responsible completion obligations, so it may take some time for their financial situation to improve."