The Korea Housing & Urban Guarantee Corporation (HUG) will launch a dedicated project financing (PF) guarantee product for construction companies that use savings banks and other secondary financial institutions this month. PF guarantees are responsible for repaying project costs (land costs, construction costs, etc.) to lending financial institutions secured by the future cash inflows and the viability of housing construction projects.
Until now, HUG has not issued guarantees for secondary financial institutions such as savings banks. However, many small and medium-sized construction companies have been trying to obtain PF loans through savings banks due to insufficient credit to use banks, and this product is being introduced considering this situation.
According to the construction industry and HUG on the 6th, HUG is preparing to launch a special PF guarantee product for construction companies obtaining PF loans from secondary financial institutions such as savings banks. A HUG official noted, "We are preparing to launch the related product this month," adding, "There has been a request from the industry, and the government's willingness to support small and medium-sized construction companies is reflected in the supplementary budget, leading to the establishment of the related guarantee." The total support scale of the PF special guarantee is 2 trillion won. Of this amount, 200 billion won will be supported by the housing & urban fund through the supplementary budget.
The product being launched this time will support up to 70-80% of the total project cost for business sites that have obtained business plan approvals. Construction companies must exceed the construction capability evaluation ranking of 100 and have a credit rating of BB+ or higher from HUG in order to use the PF special guarantee product. In the case of joint construction (consortium), all member construction companies of the consortium must also be outside the top 100 in construction capability ratings.
In the case of business sites for sale, the total floor area must be over 5,000 square meters in the metropolitan area and large cities, and more than 10,000 square meters in other regions. For rental business sites, guarantees are only provided for establishments over 5,000 square meters, regardless of the region. The guarantee fee rate is set according to the evaluation grade, ranging from 0.563% to 1.104% annually.
The government's establishment of a supplementary budget to launch HUG's dedicated PF special guarantee for secondary financial institutions is due to the low credit ratings, preventing many construction companies from using HUG's guarantees. An analysis of HUG's project financing guarantee performance from October 2022 to May this year showed that construction sites built by companies within the top 100 in construction capability rankings accounted for 83% of total guarantees. This means that small and medium construction companies with low credit ratings are barely receiving guarantees.
Kim Jong-eon, Director General of the Korea Housing Builders Association, said, "Construction companies capable of obtaining PF loans from banks have been limited due to insufficient credit," adding, "There are firms willing to use savings banks for PF loans even if it means paying a little higher interest, but many face difficulties because HUG guarantees are not being issued. We have conveyed the industry's wish for the guarantee institution to consider this issue, and the related product is being launched."
Lee Eun-hyung, a researcher at the Korea Construction Policy Institute, said, "With the launch of the dedicated PF guarantee product for secondary financial institutions, I expect the funding procurement for construction companies that had no choice but to use secondary financial institutions such as savings banks due to low credit ratings will become somewhat easier."