South ‌Korea’s Major Landowner Trust Companies Face Financial Strains

The⁣ four major⁢ landowner trust companies in South Korea have reported significant financial losses, with their⁤ deficits ⁢”snowballing” in just one year. According to recent data, KB Real Estate Trust, ⁤Shinhan Asset Trust, Hana Asset Trust, and Woori Asset Trust recorded a combined net loss of 235.5 billion ⁤won in the first half of last year.

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The largest deficit was recorded by Shinhan Asset Trust, ⁢which posted a ‍net loss of 175.1 billion won for the period. KB Real Estate Trust also reported⁢ a significant loss, with its deficit ⁤widening to 105.8 billion‍ won in the first half of the year.

The main⁤ reason for the trust companies’ poor performance is their “book-type trust” business. This type of business involves​ the ‌trust company taking responsibility for⁣ completing construction projects and compensating lenders if the construction company fails to do‌ so.

During the real estate boom from 2019 to 2022, the trust companies played a leading role in terms of performance, with high commission rates and significant increases‍ in trust assets. However, the risks associated with​ book-type land trusts are now becoming ⁣a reality, ⁤with many construction companies facing financial difficulties and trust companies facing ‌compensation ⁤liabilities and lawsuits.

According‍ to a report by the Korea Institute of Finance, the trust ‍assets of book-type land trusts more than doubled ‍from 8.4 trillion won in December 2020 to 100 billion won⁢ in September⁣ 2023. As of the end ‌of September last year, KB ⁢Real Estate Trust⁢ had 180 book-type business⁣ sites, followed by Shinhan Asset ⁢Trust with 167, Hana Asset Trust with 119, Korea Trust with 117, and Woori Asset Trust with 108.

The financial ​authorities are taking steps to address the issue, including reviewing ⁢measures to limit the trust limit⁣ to a certain percentage of equity capital and revising the part of the trust contract that states the‌ trust company compensates⁣ major shareholders for damages.

Experts are calling for the need‌ to ⁣reduce the trust company’s liability for damages in the trust contract to ‍an appropriate level. Lee Young-kyung, a senior researcher at ​the Korea Institute of Finance, said, “There are concerns that trust companies may become insolvent due to management-type‍ land trusts with ‌construction responsibilities,​ and in practice, the trust contract contains excessive provisions for compensation liability according to the ​construction responsibilities ​obligation.”

The financial authorities are working to establish trust company model standards for ​land trusts.

The government’s position is that they want to ban the book-based business model completely, but the industry⁣ is arguing that⁤ business should not be hindered as the⁣ real estate market is booming again.