The real estate project financing (PF) market is shrinking, yet the risk of project defaults remains high. Concerns are growing that the burden of defaults, which was previously concentrated in regional areas, is now increasing in metropolitan regions, potentially prolonging the resolution of PF issues.
According to the financial sector on August 10, the PF exposure as of the end of March was 169.8 trillion won, a decrease of 4.5 trillion won from the previous quarter. However, the amount of loans classified as caution (C) and at risk of default (D) rose by 1.7 trillion won to 16.4 trillion won. The balance of PF projects undergoing auction in the second quarter also increased to an average of 11.2 trillion won, marking a rise after four consecutive quarters of decline.
The decline in profitability due to high interest rates and rising construction costs, coupled with a delayed recovery in the sales market, has led to an increase in projects struggling to recover funds. Analysts suggest that as restructuring progresses, projects with relatively better viability are being normalized, which in turn increases the burden of defaults on remaining projects.
Another issue is that the problem of defaults is not limited to specific regions. In the second quarter, the balance of PF projects undergoing auction was 1 trillion won in Seoul, 4.5 trillion won in Incheon and Gyeonggi, and 5.9 trillion won in other regions. By the end of March, the figures were 919 billion won in Seoul, 3.8 trillion won in Incheon and Gyeonggi, and 4.8 trillion won in other regions. While the volume of auctions in regional areas remains the highest, the balances in Seoul and Incheon and Gyeonggi have also increased, indicating a nationwide intensification of PF defaults.
Conditions for disposing of projects that have entered the auction process are also challenging. According to court auction data, the sale price ratio in real estate auctions peaked at 72.3% in the second half of 2024 and has since declined, dropping to 58.2% in May. Although this metric does not directly correspond to PF projects, it reflects a weakening purchasing power in the overall real estate auction market, suggesting that conditions for disposing of PF projects are deteriorating. As the sale price ratio decreases, it becomes increasingly difficult to recover sufficient collateral value during the liquidation process.
The problem lies in the fact that while the number of defaulting projects is increasing, the pace of resolving these issues is slowing down. In the first quarter, the scale of restructuring and liquidation of PF projects was 400 billion won, a staggering 80% decrease from 2 trillion won in the previous quarter. With auction volumes piling up and disposal conditions worsening, there are concerns that the time required to resolve defaulting projects may lengthen.
Jung Ho-jun, an analyst at Korea Credit Rating, stated, "As unfavorable market conditions persist, including rising market interest rates and polarization in the real estate market, we are seeing a simultaneous decrease in restructuring performance and an increase in projects classified as caution or worse. Considering the maturity of main PFs and the prolonged sluggishness in sales, the trend of increasing defaulting projects at the main PF stage is likely to continue for the time being."
* This article has been translated by AI.
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