Competition among real estate trust companies for orders over redevelopment and reconstruction implementation rights in the greater Seoul area is heating up. As they move aggressively, complexes pushing ahead with maintenance projects through the trust method are also emerging one after another.
According to the maintenance industry on the 23rd, Mok-dong Complexes 1 and 2 in Yangcheon District, Seoul, on the 19th each finally designated Woori Asset Trust and Hana Asset Trust as project implementers. As a result, more than half of the 14 complexes in Mok-dong that are pursuing a reconstruction project for about 47,000 households have teamed up with trust companies to get the project fully underway. A total of eight complexes—1, 2, 5, 9, 10, 11, 13, and 14. They selected Hana Asset Trust, Korea Asset In Trust (KAIT), Korea Real Estate Investment & Trust Co. (KOREIT), Korea Asset In Trust, Daishin Asset Trust, and KB Real Estate Trust as project implementers, respectively.
The trust method means that, instead of an association, a trust company is entrusted to implement the project. It was introduced in 2016 and has been drawing attention recently as construction cost disputes have become a key issue due to soaring material prices. Because the process of establishing an association can be skipped, the maintenance project period can be shortened, and it is advantageous in negotiations with builders. Some also see it as relatively more transparent than the association method.
Real estate trust companies are also moving quickly to win major project sites to capture this demand. That is because expanding existing main revenue sources such as responsibility-completion management-type land trusts and borrowings-type land trusts has become difficult. In a responsibility-completion trust, if the builder or developer fails to complete by the deadline, the trust company agrees to fulfill that obligation. In a borrowings-type land trust, the trust company is delegated ownership from the land owner, raises financing from financial institutions to complete the project, and receives a set fee.
Initially, during the COVID-19 real estate boom, trust companies embarked on octopus-like investments through these methods. But as the construction market later slumped, cases of having to shoulder bad assets have occurred one after another. With the financial authorities applying the brakes, they now need to seek new revenue sources. The Financial Services Commission created a limit standard capping the total expected risk amount of borrowings-type land trusts at within 100% of equity capital starting in Jul. last year, and decided to apply it gradually through the end of 2027.
Given the situation, these trust companies are focusing on maintenance projects through organizational reshuffles. Korea Real Estate Investment & Trust Co. (KOREIT) further expanded its urban maintenance business institutional sector last month. It had already expanded the urban maintenance business institutional sector last year from two divisions and six teams to three divisions and seven teams, and this time grew it again to nine teams. It also created an urban regeneration support team to strengthen not only order-winning functions but also risk management capabilities across the business.
Daishin Asset Trust issued corporate bonds to operate new orders related to urban maintenance. Last month, it conducted a corporate bond book-building for the first time ever and succeeded by securing funds amounting to five times the target. Korea Trust also expanded its urban regeneration business division, which had been run under a headquarters system, and set a policy to focus on high-quality maintenance projects such as redevelopment and reconstruction in Seoul and the greater Seoul area.
Of course, from the standpoint of complexes pushing maintenance projects, the trust method does not have only advantages. They must pay the trust company around 1% to 4% of total revenue as a fee, and the opinions of owners or the association may not be properly reflected. Because of this, there have been complexes where conflicts arose between the trust company and owners, leading to the dismissal of the entire trust management or termination of the trust contract and a shift to the association method.
A maintenance industry official said, "As the number of complexes where maintenance projects have stalled due to construction cost disputes increases, demand is growing for the trust method, which has expertise and funding power," and added, "Trust companies, too, are focusing on more stable urban maintenance project orders as the risks of responsibility-completion trusts, their previous main business, have grown." The official also noted, "However, the trust method is still in its early stages, so it is necessary to carefully examine whether the trust company in question has sufficient project execution capabilities."