Responsibility-completion type land trust, which had been a key revenue source for trust companies during the real estate boom, is turning into a financial burden amid the downturn. With construction delays overlapping with builders' cash crunches, the expenses borne by trust companies have increased, leading to large provisions and recognition of losses. Some trust companies have even seen their credit ratings cut and carried out voluntary retirement programs, heightening a sense of crisis across the industry.
According to the real estate trust industry on the 9th, Korea Trust recently implemented its first-ever voluntary retirement program since its founding. It accepted applications from some regular employees through on the 26th of last month and plans to complete retirement procedures for those selected around the 10th. The number of people is said to be in the single digits.
The industry sees the impact from losses related to responsibility-completion land trusts as a significant factor worsening Korea Trust's finances. Korea Trust posted a net loss of about 84.3 billion won last year. The loss widened by 65.1 billion won from a year earlier. Its debt ratio also rose to 195.8%.
It is not just Korea Trust's problem. Last year's operating profit at large trust company Korea Asset In Trust was 9 billion won, down 61.1% from 23.1 billion won a year earlier. Woori Asset Trust of Woori Financial Group also recorded a net loss of 220.6 billion won last year. Loss recognition increased at responsibility-completion business sites and the burden of provision buildup grew. In the process, Woori Asset Trust's equity capital nearly halved in a year.
Credit deterioration is continuing as well. In April, Korea Trust's rating outlook from NICE Investors Service and Korea Ratings was lowered from "BBB stable" to "BBB negative." NICE Investors Service also cut the corporate credit ratings of Woori Asset Trust and Korea Asset In Trust to "A- stable" from "A negative," respectively.
Other trust companies are in similar shape. Korea Ratings downgraded Hana Asset Trust's credit rating from "A+ negative" to "A stable." Korea Credit Rating lowered Kyobo Asset Trust's commercial paper rating from "A2-" to "A3+." It is also monitoring Korea Investment Real Estate Trust with an outlook of "BBB+ negative." The industry views the A- level as a key threshold separating institutional investor demand amid high uncertainty in real estate project financing (PF).
A responsibility-completion land trust is a structure in which a trust company supplements a builder's obligation to complete construction. When the real estate market was strong, it was considered a business that could generate fee revenue. But as the market weakened and construction costs rose, the burden increased. As construction was delayed at some business sites or builders faced cash shortages, cases in which trust companies had to inject additional funds grew.
These funds are recorded on financial statements as trust-account loans. An increase in trust-account loans is not always negative in itself. However, in the current environment where the presales market is contracting and recoveries at business sites are being delayed, it becomes a factor pressuring the soundness of trust companies.
According to a real estate trust industry report by Korea Credit Rating, the industry's total balance of trust-account loans stood at 9 trillion won at the end of last year, up about 16.5% from a year earlier. During the same period, loan-loss provisions rose from 1.0196 trillion won to 2.6059 trillion won. Land trust fees fell 27% to 472.4 billion won. The average debt ratio also climbed from 62.8% to 102.8%.
A trust industry official said, "When business is active, an increase in trust-account loans cannot be viewed negatively in itself, but now the problem is that balances are growing while the provision burden is rising and operating profit is falling," adding, "With the debt ratios of half of the 14 trust companies exceeding 100%, there are also concerns about the potential for additional restructuring."