Rumors of a 100-fold solo business abound… A firefly investment that caused bankruptcy

On the 20th, most of the refrigerated warehouses at a logistics center in Gyeonggi-do were empty. Many logistics center business sites in the metropolitan area are being pushed into bankruptcy as their business viability has declined due to high interest rates and rising material prices. The delinquency rate of real estate PF loans from securities companies that have contributed funds to these businesses is also increasing rapidly. By Jang Kang-ho, staff reporter

A ‘warning light’ was turned on in the logistics center development project, known as ‘the goose that lays golden eggs’ and ‘logistics lottery’, and it caused investment craze. New construction projects have been stopped one after another, and the number of businesses facing bankruptcy due to non-payment of loans is increasing rapidly. This is the result of a combination of high interest rates and overinvestment. There is growing concern that the spark of business insolvency will spread not only to banks and securities, but also to the entire financial sector, including savings and capital banks, as the total number of loans from logistics center collateral project finance (PF) alone amounting to several trillion won.

According to JLL Korea, a global real estate service company on the 20th, 15 business sites (27.2%) of 55 new logistics centers with a total floor area of ​​33,000 m² (10,000 pyeong) or more were confirmed to be planned. to be completed within this year has had difficulties such as delays. The total floor area of ​​the 15 business premises alone is equivalent to 1,421,487 square meters (430,000 pyeong). Considering that they borrowed 3.5 to 4.5 million won per 3.3 square meters for real estate PF, at least 1.9 trillion won or more are at risk of being converted into bad loans. The industry understands that there are about 20 places where construction has stopped even in medium-sized distribution centers under 33,000 square meters, and loans amount to several trillion won. The development of the logistics center was highlighted as a ‘100-fold project’ because it could be started even with a 10% down payment.

There are two reasons why the logistics center development project, which sucked up investment like a black hole, quickly went bankrupt. First of all, construction costs increased by 40% compared to last year due to an increase in raw material prices. Additional loans are needed to complete the project, but financial companies have closed their wallets in battle. An official from the securities industry said, “Business viability has decreased significantly due to the increase in the interest rate, making it difficult to obtain additional loans.

Carefully completed work sites also struggle to find tenants. Logistics centers typically fill 80% of tenants upon completion, and then sell all to recoup the investment. However, as the supply of logistics centers has increased in a short period of time, demand has not been able to keep up. Coupang and Market Kurly, the ‘big hand’ who seemed to buy as soon as they built, were also affected by recent restrictions on expansion. “I can no longer afford to pay 500 million won in interest per month,” said a developer company representative.

Developers jumped into the logistics boom, even borrowing more than 100 times their equity capital
As construction costs and interest rates rise, the feasibility of business … Construction stopped everywhere and ‘tongton’ on completion

Low temperature logistics center in Gyeonggi-do on the 20th. With a total floor area of ​​30,000 square meters (about 9,000 pyeong) with 36 docks (cargo loading docks), it was difficult to find not only freight cars, but also managers. When I went up to the second floor, there were unopened vinyls after completion, and only the sound of a fan filled the empty warehouse instead of the sound of a truck. An official from a nearby real estate agency said, “After the project was completed in June, we were unable to find a tenant, so we only paid hundreds of millions of money earned in interest every month.

○ This was the greatest boom in history, but…

[단독]    Rumors of a '100-fold business' are rife... A 'firefly investment' he called bankrupt

A ‘red light’ has been switched on in the logistics center business, which saw the biggest increase in history due to an increase in parcel delivery and fresh food delivery. Construction is halted because construction costs cannot be obtained, or even after completion, the vacancy rate is high, making it impossible to sell. There are concerns that business insolvency could spread to the entire financial sector as each business site has borrowed tens of billions to hundreds of billions of money earned using the logistics center as collateral.

Until last year, the logistics center business was a ‘lottery’ business that no one but people in the know knew about. The business structure is reminiscent of ‘Ilchakcheongeum’. First, they establish a corporation with a capital of 1 billion to 2 billion won and then look for land to build a logistics center on. After that, investors are recruited who can pay the down payment, which is about 10% of the land sale price. Once the land contract is signed, the business will flow smoothly. He receives a loan from the financial sector using the land as collateral, and at the same time moves forward with the licensing work for the logistics centre.

When the construction of the logistics center begins, full investment comes in. Funding of real estate projects (PF) procured from securities companies, banks and insurance companies is the main source of funding. PF real estate refers to a financial technique where a financial company gives a loan based on business performance and future cash flow. A PF manager in a securities company explained, “Not so long ago, demand was so high that every tenant could be found before the project was completed.

But recently, the situation has changed dramatically. Business site B in the metropolitan area is a typical example. The CEO of this factory joined the logistics center business with an earned capital of 1.5 billion. In the process, a real estate PF loan of 120 billion was received in the name of balance of land, cost of construction, and cost of finance. It was expected that the rental would go well after completion, but the vacancy rate is currently 80%. CEO Lee said, “If the vacancy rate does not fall below 20%, it is difficult to sell.

○ Rising material costs and high interest rates ‘making it worse’

The reason why the logistics center development project suddenly became difficult is the increase in construction costs and rising interest rates. The construction cost increased by more than 40% from 3.5 million won per 3.3 square meters last year to 5 million won this year. “The construction cost is higher than expected, so we need to take additional loans, but no loans are coming out,” said a representative of a construction company. An official from the PF team at a securities company said, “There are not many financial institutions that will provide additional funds at a time when the possibility of bankruptcy in the logistics center is high.” Industry insiders believe that the Financial Supervisory Service’s mention of the need to strengthen robustness in relation to PF loans in July also had an impact on the financial crunch.

Interest rates are also rising. Interest on real estate PF loans (based on seniority) has recently doubled from last year (around 4% p.a.) to 8-9% p.a. An official from a comprehensive real estate service company said, “Doubling the interest rate means that the business viability of the logistics center has dropped by half.

Another problem is that the supply of logistics centers is greater than the demand. According to Savills Korea, there were 488 distribution centers nationwide this year, an increase of 65.4% from 2019 (295). By 2024, an additional 260 units, or 53.2% of the total logistics center, will be built. An industry official said, “Recently, the number of operators jumping into logistics center development without expertise has increased rapidly.

Loan insolvencies are already emerging. The delinquency rate of real estate PF loans in securities companies was 4.7% in the first quarter, more than three times higher than in 2019 (1.3%). Industry forecasts are that this ratio will increase further in the second and third quarters.

By Jang Kang-ho/Kim Woo-seop, staff reporter callme@hankyung.com

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