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2023 May/22
Korean Securities Firms' Real Estate PF: Risk Factors and Future Responses
Issue Papers 23-10
PDF
- Research Topic Financial Services Industry
- Page 25
- Summary
- Real estate project financing in South Korea is characterized by a unique structure marked by high leverage and ongoing financing throughout a project. A slowdown in the market and other factors leading to decreased profitability in real estate development projects could expose the vulnerability of the financing structure, thereby increasing risks associated with real estate PF. An analysis was carried out on the yields on asset-backed commercial paper (ABCP) for real estate PF guaranteed by securities firms. The results revealed that in a stable market, credit ratings were the sole factor affecting yields, while during a crisis, several other factors came into play. This suggests a scenario in which the risk associated with real estate PF could be underestimated during periods of high profitability in real estate development projects. Therefore, investors involved in real estate PF should exercise caution when expanding their exposure to this market during a real estate boom.
It is also noteworthy that real estate PF is now more interconnected with financial firms and capital markets than ever before, thanks to a broader range of financial firms and a greater variety of financing options available in the market. However, the risk of real estate PF has increased as the market has deteriorated since 2022. The government and participants in this market should monitor not only the constructors, businesses, and financial firms involved in real estate PF, but also the whole macroeconomic environment including the money market and real estate market. Especially in 2023, they need to be vigilant regarding the potential for risk transfers between real estate PF, financial firms, and markets. Moreover, when extending liquidity and other policy support to real estate PF businesses, the government needs to enhance market discipline by thoroughly evaluating business feasibility and profitability, and enforcing stringent qualifications for policy support.
In the short term, securities firms that typically participate in this market through asset-backed securities (ABS) and refinancing should assess their own risks to secure additional liquidity or unwind their positions, while also preparing their responses in the event of any real estate PF business defaults. They should also adopt long-term strategies to enhance internal controls related to real estate PF. This includes establishing risk management standards for real estate PF that consider expected returns and risks, exercising caution against excessive risks or following trends with certain developers, and redesigning their staff remuneration policies and examination criteria that align with the nature of real estate PF. Additionally, it is essential to review the issuance of ABS with maturities that align with those of real estate PF loans.