Key Points: The financial authorities have announced on May 13 that they will begin a major restructuring of the real estate Project Financing (PF) market. This move follows the Lego Land crisis at the end of 2022 and represents the government’s fifth PF-related measure since then.

Main Content:

1. Strengthening PF Project Assessment Standards: The criteria for assessing the viability of PF projects will be refined from the current three levels to four, separating the “deterioration risk” into “caution” and “potential default” ratings. The new categories will be excellent, good, caution, and potential default.
2. Encouraging Exit of Non-performing PF Projects: Projects that have extended their maturity more than four times, or have not paid overdue interest upon such extensions, or have failed to sell at auction more than three times, will be designated as “potential default” and targeted for exit.
3. Easing Loan Regulations for Financial Institutions: Normally, if a financial institution were to invest new money into a non-performing PF project, its creditworthiness would be classified as ‘below caution.’ However, new additional funds will temporarily be classified as ‘normal.’
4. Support for Market Stabilization: Banks and insurance companies will inject up to 5 trillion won of ‘new money’ into the restructuring of PF. Additionally, financial institutions will evaluate the viability of PF projects using the newly strengthened criteria next month and submit the evaluations to the Financial Supervisory Service, which plans to review and adjust the results by August.

Specific Scales:

• Size of Non-performing PF Projects: It is estimated that about 2-3% of all PF projects, amounting to 7 trillion won, will go to auction.
• Restructuring Volume: Up to 23 trillion won
• Financial Institution Investment Size: Up to 5 trillion won

Expected Effects:

• Elimination of instability factors in the real estate PF market
• Facilitation of funding for normal PF projects
• Establishment of a healthy real estate market

Controversies:

• Concerns that the size of non-performing PF projects may exceed expectations
• Potential for additional losses for financial institutions

Outlook: The financial authorities expect that these measures will contribute to the recovery of the health and stable growth of the real estate PF market. However, there are concerns that the size of non-performing PF projects could increase beyond expectations, potentially posing risks to the financial system. The authorities will need to continue monitoring and making efforts to address these concerns.