As unrest in the global financial market sparked by the bankruptcy of Silicon Valley Bank (SVB) in the U.S. does not subside, concerns about insolvency in real estate project financing (PF) are rising again. In a situation where the real estate market continues to stagnate, financial instability intensifies and a liquidity crisis erupts, so real estate PF, which has soared mainly in the non-banking sector, could become a ‘time bomb’.
According to the Bank of Korea, the balance of real estate PF loans reached 117 trillion won at the end of last year, the largest increase ever. Of these, 74% are concentrated in the secondary financial sector, such as insurance, securities, and savings banks, which are relatively more vulnerable to crises than banks. Unlike banks, which were passive in PF loans after the savings bank crisis, the second financial sector, which started diversifying its business, significantly increased PF loans amid low interest rates and a boom in real estate.
It is estimated that the real estate PF risk exposure in the secondary financial sector exceeded 200 trillion won at the end of last year. It has more than doubled in size in the last four years. The Institute of Finance estimated this by adding up real estate PF loans, payment guarantees, and securitized securities. At least, banks have started PF projects focusing on relatively safe apartments, but the risk of insolvency is higher in the secondary financial sector, which has low capital capacity, because it has many commercial real estate businesses. The ratio of loans to high-risk businesses with low pre-sale rates is 30% for savings banks and 24% for securities companies.
Even before the SVB crisis, the real estate PF market had been exposed to various adverse factors such as rising interest rates, falling real estate prices, and rising construction costs due to inflation, raising concerns about insolvency. The number of unsold homes nationwide has already exceeded 70,000. In this situation, the financial instability caused by the banking crisis in the US and Europe is highly likely to explode latent insolvency risks.
At the end of last year, the awareness of real estate PF, which had been heightened due to the Legoland crisis, has loosened in the aftermath of the recent real estate deregulation. The financial sector must preemptively manage real estate PF, which can trigger a crisis as a small crack can lead to a systemic crisis. At the same time, it is necessary to prepare for the worst situation by preparing various crisis scenarios while restructuring PF workplaces that have reached their limits early. The belated response to the Legoland incident that caused chaos in the capital market last year should not be repeated.