하나은행 하나금융경영연구소

Following the Asian financial crisis in the late 1990s, real estate development financing
has evolved into PF loan and securitization business.
-As the market players were divided into developers and constructors in an attempt to
spare housing builders from risk of new property sales following the financial crisis,
small developers relied on real estate project financing as a way to finance initial development
including land purchase.
-Real estate PF loan grew significantly as a new source of financing amid housing price
hike spurred by deregulation in the first decade of 2000, and PF ABS market also recorded
fast-paced growth for off-balance sheet financing.
-Banks saw their loans to real estate and leasing business growing among their entire
portfolio after the Asian financial crisis as the real estate PF market developed, while the
share of construction loan hovered around 5%.

With developers being financially vulnerable, constructors bear a disportionate share of risks
by taking loans.
-Developers do not have expertise and capital sufficient enough to carry out large-scale apartment
development projects. Lack of a valuation system for real estate projects which tend to show high
uncertainty in cash flow also hinders  active participation of financial institutions.
-Contrary to project financing in theory, under the local conditions in Korea, constructors take up
most of risks, as they are required to take loans for debt assumption, joint liability and other needs,
and their credit ratings are taken into account in PF loan eligibility assessment.

PF loan sales were reduced owing to growing default risk, as the construction market remained
sluggish after the financial crisis.
-There were a number of contributing factors including tougher regulation by financial authorities,
less loans offered by financial institutions to enhance financial soundness, sales of non-performing
PF loans, and adoption of IFRS. 
- Less PF ABS were issued driven by reduction of PF loan sales and tougher standards for
securitization.
-on the contrary, while real estate PF ABCP showed sound growth owing to its relatively
convenient issue process, liquidity risk of constructors came to the surface as more and more
ABS with shorter maturity were issued amid the sluggish market.

Mutual savings banks whose non-performing PF loans have been disposed of in one way or
another are likely to loan less affected by deregulation.
-With PF loans by mutual savings banks, notably highly-risk bridge loan, going default due to
sluggish housing market, there was a massive restructuring of mutual savings banks by way of suspension
of business and KAMCO's purchase of their non-performing PF loans.
-Mutual savings banks will be forced to further reduce PF loans, given tougher regulation such as
abolition of higher loan limit allowed for financially-sound mutual savings banks and stricter requirements
for PF loan reserves.

What is required is a diversified approach, rather than a government-led one.
-As for land, development projects, or other assets which are complicated to value and do not generate
cash flow, conventional asset securitization or asset disposal via auction or public sale should not be
enough to improve recovery rate of bad assets. 
-Promoting block deals to combine good assets and bad loans in a package for sale and extending the
idea of partnership to sale of non-performing assets are some of good approaches to expedite the disposal
and improve recovery rate.

Tailored approaches are recommended to promote market participation by the private sector.
-If bad loans grow in scale and scope, the government-led mechanism should only go so far in terms
of enhancing both market stability and efficiency.
-Agency Mortgage, REITs, and Hybrid REITs are good examples to consider as a way to dispose non-
performing loans held by the public sector by taking advantage of private funds, in an effort to diversify
solutions for ailing development financing.
-Formulating effective policies to supply liquidity to constructors and facilitate recovery of real estate market
by expanding public-private partnership (e.g. land fund) is also critical.
-More active participation by the private sector would not just contribute to securing capital, but also to
advancing the asset securitization market and the capital market as a whole.

Cutting investment cost, re-designing risk sharing scheme, and taking other alternative approaches
to development financing should be sought.
-With base demand in the local real estate market shifting from investment to actual demand, new
real estate sales become less attractive as investment, while rental or cash flow properties attract
more and more investment and demand.
-Despite the shift, developers are still challenged under the current financing and risk sharing
system which makes it difficult for them to supply the latter type of real estate.
-Effective response to changing market trends should be made by setting up a business model
that can save initial investment cost along with the efforts to revamp land compensation system and
enhance development projects involving landowners to be more effective.
-It is also recommended to distribute risks currently concentrated on the market and facilitate flow
of funds in the development financing market by encouraging specialized developers to be engaged
in the market and sharing business risks with financial investors.