750 trillion private real estate shadow finance red light… Stop the spread of risk

With interest rates rising, ‘shadow real estate finance’ is emerging as a new deterrent that threatens market stability. As the real estate market shrunk, the real estate market boomed, and the surge in logistics center (PF) collateral project financing is having an immediate impact. 15 of the 55 new logistics centers with a total floor area of ​​33,000 square meters or more, which were due to be completed within this year, are said to be experiencing construction disruptions. As a result, more than 1.9 trillion earned from PF funds was at risk of being converted into non-performing loans.

The amount of shadow finance linked to real estate, such as PF and real estate funds and trusts outside the banking system, which are not subject to the normal soundness regulation of the supervisory authority, is estimated to be around 750.3 trillion won (as at the end of last January). Compared to the 446.9 trillion won at the end of 2018, it increased by 68% in three years, setting a new record high. Among them, real estate trusts have the largest amount of 347.5 trillion won, followed by real estate funds with 129.1 trillion won, special asset funds with 119 trillion won, and non-PF loans is a bank with 78.1 trillion won. This is because securities companies, insurance companies, capital companies, savings banks, and real estate trust companies have been competing to increase investment, loans, and guarantees, leading to the boom in the real estate market.

Investment in this area led to diversification of the profit structure during the boom in the real estate market, but there are signs that it will boomerang as interest rates soar and construction costs increase. The problem is that if the real estate market freezes and the business is stopped or unsold houses spread, there is a high risk that the financial system and the whole economy will be shaken by a transfer to financial institutions . Apart from the 1,800 trillion won in home loans, it is a ‘potential bomb’ that threatens the Korean economy. The Korea Finance Institute estimated that 202.6 trillion won, or 27%, of the total shadow real estate financing is at risk of insolvency.

An economic downturn caused by a rapid increase in interest rates appears to have been predicted. The real estate market is also expected to continue to fall. Preventive risk management is urgently needed to prevent real estate finance from acting as a credit risk primer. The start will probably be a small and medium construction site in the province. It is an urgent priority for the financial authorities to understand the status of business sites throughout the country and strengthen monitoring. A step-by-step liquidity response strategy should also be prepared through stress tests following increases in interest rates and decreases in real estate prices. It is also essential to prevent losses from individual financial firms from passing on to other financial firms, such as by implementing voluntary exercise agreements for PF business sites with a high risk of insolvency.

Above all, the soft landing of the real estate market has become more important. In this way, it is necessary to reduce the market shock and motivate the financial institutions to reduce the share of real estate financing themselves. It goes without saying that the industry’s own ‘survival and exit strategy’ must be established.

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