The trust industry, which had collected fees on the condition of assuming Sigongsa's deficiencies, has been cornered as completion-guarantee risks erupted amid a slump in the real estate project financing (PF) market. In particular, courts have repeatedly ruled that trusts must compensate the full principal and interest on loans regardless of the reasons for construction delays, stoking concerns about weakening financial soundness across the trust sector.
According to the construction and trust industries on the 21st, courts including the Seoul Central District Court have recently issued a string of rulings broadly recognizing a trust company's liability for damages when Sigongsa fails to meet its completion guarantee. While lenders have demanded full repayment of principal and interest, trusts have argued they should pay only delayed interest, prolonging legal disputes.
Lenders argue that because a completion guarantee was promised and the deadline was missed, the trust must assume the debt and repay the full principal and interest in place of Sigongsa. Trusts counter that they will cover only direct damages, such as additional delayed interest caused by the late completion.
But in recent damages suits between lenders and trusts, the courts have been unequivocal. Judges have sided with lenders, ordering trusts to repay both the full principal and interest and the delayed interest.
In Jan., KB Real Estate Trust (KB Trust) lost a lawsuit over failure to fulfill a completion guarantee at a mixed-use development site in Nonhyeon-dong, Incheon. KB Trust immediately appealed, saying full repayment of principal and interest was excessive because the PF loan had been repaid in stages.
Shinyoung Real Estate Trust also received a court ruling ordering it to pay 7 billion won and delayed interest for failing to fulfill completion-guarantee obligations at an officetel project in Ganseok-dong, Incheon. Shinyoung Real Estate Trust has responded by appealing.
Courts have not accepted the reasons for construction delays cited by the trust industry. Trusts have argued that various external factors—such as raw material shortages, strikes, and severe weather—are "force majeure" and should exempt or reduce liability. But in the case of Shinyoung Real Estate Trust, even with a variable of delayed fund disbursement by the lenders and a completion overrun of just one day, it could not avoid a ruling for full compensation.
Earlier, in May last year, Shinhan Asset Trust was ordered by a court to pay 25.6 billion won in loan principal and delayed interest over a delayed completion of a logistics center construction project in Pyeongtaek, Gyeonggi Province. It was the first domestic case in which a court recognized a real estate trust's liability for the full principal and interest on loans at a site where it had assumed a completion guarantee.
Shinhan Asset Trust subsequently lost consecutive cases involving a logistics center in Anseong, Gyeonggi Province (6 billion won), and a logistics center in Wondchang-dong, Incheon (57.5 billion won), among others. It ultimately chose a stopgap solution, settling and closing roughly 10 similar suits totaling about 300 billion won. The decision reflected a judgment that it was better to pay sunk costs and resolve the risk quickly than to shoulder delayed interest and uncertainty from protracted litigation.
In reality, the expense of trusts directly injecting construction costs in place of Sigongsa has surged. According to the Korea Financial Investment Association's electronic disclosure system, loan-loss provisions at 14 major trust companies surpassed 2.45 trillion won as of the third quarter of last year, a 24% jump from the first quarter (1.98 trillion won). Mugunghwa Trust, a smaller firm, saw its net capital ratio (NCR) plunge to 69%, falling below the 100% regulatory threshold, and received a management improvement order from the financial authorities in 2024.
As trusts have effectively halted taking on completion-guarantee mandates to manage risk, funding channels for small and midsize developers have also been blocked. Without a trust's credit enhancement, these developers—unable to roll into main PF—are scouring the private money market for high-interest subordinated loans.
An executive at a domestic developer, identified as A, said, "Trusts judged that, compared with debt-type trust products where they inject money directly, completion-guarantee trust products—where developers and Sigongsa borrow from financial institutions with the trust's credit support—carry lower risk and offer higher profitability," adding, "From 2020 through the first half of 2022, a real estate boom, they bet that the probability of Sigongsa defaulting was low and aggressively pursued completion-guarantee mandates."
The executive added, "As construction costs spiked in a short period and rate hikes continued, the real estate market slumped sharply. Developers and Sigongsa, especially those with business sites in the provinces, began to topple one after another due to cash crunches, transmitting distress to trusts," and, "Because trusts have stopped marketing completion-guarantee products, a chain of defaults among small and midsize provincial developers and Sigongsa is only a matter of time."