Baik, Minseok. Primary Author, Assistant Professor, Dept. of Real Estate Studies, Semyoung University, Kim, Jaehwan

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1 , pp A Study on the Activation of the Real Estate Market with Alternatives to Improve the Financial Structure of Suspended Project Financing Projects of Mutual Savings Banks Baik, Minseok Primary Author, Assistant Professor, Dept. of Real Estate Studies, Semyoung University, Kim, Jaehwan Corresponding Author, Assistant Professor, Faculty of Regional Develop, Kongju Nat l University Abstract. The purposes of this study were to examine the current state of project financing (PF) projects of mutual savings banks whose construction was suspended and identify policy alternatives needed to continue their construction. By comparing and analyzing the insolvent PF projects of mutual savings banks whose data were collectable in the liquidation and continuing business value, the study showed that their normalization through institutional improves could have positive effects on the soundness of national assets and activation of the real estate market. Keywords: suspension of construction, mutual savings bank, PF project, KAMCO, develop REITs 1 Introduction It is estimated that approximately 450 real estate PF projects have been suspended around the nation as they did not go as planned (Gwon Yeong-su and Choi Wan-ho, 2014). The financial institutions involved in those projects are thus subjected to inscrutable losses. As many as 20 mutual savings banks closed down due to such administrative measures as suspension of business because their project financing (PF) projects went insolvent (Hwang Jin-yeong, 2012). The govern has made efforts to stabilize those financial institutions and activate the real estate market in the concerned areas: the normalization of those projects has been pushed ahead through KAMCO for the stabilization of financial institutions; and Act on Special Measures to Arrange Buildings Left Neglected for Years after Suspension of tion (hereinafter, Act on Special Measures) was enacted to restore those suspended projects (Shin Jong-chil and Baik Min-seok, 2015). This study thus set out to examine the current state of suspended PF projects of mutual savings banks whose data were collectable and come up with alternatives to promote their normalization. The study ISSN: ASTL Copyright 2015 SERSC

2 made multifaceted research approaches including literature study, statistical analysis, and legislation analysis. The findings will hopefully contribute to the improve of concerned laws and financial institutions and the specific alternatives for the practical normalization of suspended PF projects. 2 Review of Theories and Previous Studies 2.1 Influences of PF Insolvency Project financing (PF) refers to a type of financing technique to find repay sources in a cash flow created by a project independent from the business owner to raise funds from financial companies for a certain project (Yang Gi-jin, 2011). In recent years, many domestic PF projects have resulted in insolvency due to the uncertain real estate business and excessive supply. The reported causes include that business impleers and financial institutions failed to analyze the validity of concerned projects (Shin Jong-chil and Baik Min-seok, 2015) and then that the subjects of PF projects committed moral laxity and loan irregularity(ahn Nam-seong, 2012). This study focused on the PF projects of mutual savings banks that were suspended and whose liquidation and continuing business values were fully evaluated. 2.2 Subjects of Normalization of Suspended PF Projects There are some difficulties with judg in this area due to an insufficient number of previous studies. Insolvent PF projects will inevitably lead to value deterioration when left neglected, which will in turn cause damage to the asset soundness of participating financial institutions. In an attempt to compensate for those problems, KAMCO decided to participate in the normalization of suspended PF projects of mutual savings banks. KAMCO put forward arrange measures to normalize suspended PF projects of mutual savings banks including selling an establish after debt rescheduling of a business impleer with an insolvent business and completion of land works, selling an establish to develop project invest funds or REITs after getting permission and authorization and appointing a construction company, and allocating recovered amounts after the completion of construction and sales (KAMCO, 2011). In the process, KAMCO set up PFV through invest in kind for credit and preferential beneficiary right and tried to do business by having land transferred from the old developer based on the credit of PFV. 2.3 Ex-Post Settle-Conditional Acquisition Ex-post settle-conditional acquisition mutually settles a difference between the rough estimate of purchase price and the recovered amount at the time of credit being collected after the pay of the rough estimate of purchase price when concluding 8 Copyright 2015 SERSC

3 an acquisition agree. Since the profit and loss related to the credit collection is eventually recovered by a mutual savings bank, a selling institution, it is difficult to see it as sales in its true meanings. Mutual savings banks can post such soundness indicators as BIS ratio in a short term from the date of selling insolvent assets to the date of credit collection (ex-post settle). KAMCO made an ex-post settleconditional acquisition agree with a mutual savings bank, inquiring the insolvent PF credit of the bank. Fig.1. Normalization process of suspended PF projects of mutual savings banks (Shin Jongchil and Baik Min-seok, 2015) 3 Analysis of Suspended PF Projects of Mutual Savings Banks 3.1 Suspended PF Projects of Mutual Savings Banks The present study analyzed 13 PF projects of mutual savings banks purchased by KAMCO whose continuing business and liquidation values were assessed for normalization purposes. Table 1 presents the overviews of the 13 establishs. Considering that KAMCO purchased approximately 500 insolvent PF establishs of mutual savings banks, the successful impleation of their continuing businesses will hold importance in reducing the national loss and preventing the loss of the financial community. The mean purchase rate of business lots of the establishs was 86.54%, and their major purpose was aparts in most cases. There were differences in the permission, authorization, and busines stages among them. Table 1. Overviews of suspended PF projects of mutual savings banks NO Location Total credit amount Ratio of obtained credit Purchase rate of business lots Major purpose Floor area ratio Size Permission and authorization stage promotion stage Liquidatio n value Continuing business value Copyright 2015 SERSC 9

4 1 Seoul 70,146 83% 100% 400% Seoul metropolita n area Seoul metropolita n area Seoul metropolita n area 73,777 89% 90% 46, % 100% 54, % 91% 5 24, % 100% 6 22,000 84% 83% ,503 82% 100% 17, % 100% 53,770 52% 97% 2, % 100% 37, % 100% 15, % 57% 196,614 35% 67% 210% 210% 327% 247% 199% 3 stories underground~20 (38 households) tion Unauthorized has not 1 story underground~20 Approval for business plan (729 households) underground~15 Approval for business plan (338 households) underground~34 (299 households) approval underground~22 Approval for business plan (634 households) underground~15 (192 households) 557% 498 households 224% 250% 1045% Residential and 1056% commercia l complex 220% 250% underground~20 (496 households) underground~15 (247 households) 6 stories underground~33 (196 households) approval 6 stories underground~34 Approval for business plan (409 households) 1 story underground~15 (403 households) approval underground~25 Approval for business plan (2,059 households) 40,161 53,322 3, ,211 26,462 25,172 Acquisition of some lots 25,592 53,539 9,183 7,692 8,458 25,575 23,391 26,641 7,651 18,180 24,606 24,593 10,187 26,524 9,315 41,735 Acquisit ion of some lots 6,065 12,228 Acquisit ion of some lots 41, ,594 Subtotal/ Average 700, , ,006 Rearrange of internal data of KAMCO, unit of total credit, liquidation value, and continuing business value: a million The study then analyzed an actual case of PF projects in Table 1. The PF project was an apart project in Seokchon-dong, Songpa-gu, Seoul. It contained four stories underground, 20, two building complexes, and 38 households (80-90 pyeong). The sales price per pyeong was set at 36,500,000. The issue of a PF loan began in September, It was suspended in May, A Mutual Savings Bank, the creditor of the PF project, has 70,146 million won left to be paid in its loan principal to the project. Its continuing business value accounted for 76.02% of the principal at 53,322 million won, and its liquidation value was 57.25% of the principal at 40,161 million won. The establish paid 70.1 billion won (82,930,000 won per pyeong) for land purchase and financial costs based on the total 10 Copyright 2015 SERSC

5 credit amount. Its feasibility was deemed to be affected by the initial construction costs of 15 billion won, compensations for 5.2 billion won that went to the developer at the time of enforce rights acquisition according to PFV foundation, and other possible additional costs. The credit evaluation results show that its continuing business value was higher than its liquidation value by 10,634 million won. According to the assumptions for the evaluation of its continuing business value, an additional 15 billion won will be needed before resuming construction. Since the project consisted of upscale aparts whose sales price per pyeong was 36,500,000 won, it had a risk of unsold aparts according to the real estate economy. The stepwise details and structures to normalize PF Project 1 were as follows: an in-depth review of suspended PF projects of mutual savings banks shows that additional loans will be collectable through normalization. It is not, however, pushed ahead actively partially because there is no driving force for it based on the ex-post settleconditional acquisition and contract method by mutual savings banks and KAMCO and partially because the subjects of participation are not clear in impleing PF with the additional costs for normalization and further business lots as securities (it can be solved by converting to the PFV approach involving invest in kind for the concerned business lots by KAMCO) Analysis of Normalization of Suspended PF Projects of Mutual Savings Banks The present study analyzed the normalization processes of suspended PF projects of mutual savings banks and identified the following problems: First, a feasibility test is done poorly for the continuing business and liquidation value of suspended PF projects. KAMCO applied the normal sales prices and assumed that 100% of aparts would be sold within 24 months from the start of construction. It failed to make accurate judgs of the current environ of the real estate market. The cash flows of those projects pose a risk of additional losses to a certain degree when getting a discount for the sale prices. When the establish, which was presented as a ground for the argu that those projects had high continuing business values, was compared with its neighboring properties, it became apparent that a loss might occur in the additional invests as well as the collection of old credit. In other words, KAMCO failed in the validity analysis of normalization of those projects (Shin Jong-chil and Baik Min-seok, 2015). Secondly, KAMCO purchased even the loans of insolvent projects whose land purchases were not completed without any consistent criteria when acquiring suspended PF projects of mutual savings banks. The ex-post settle-conditional acquisition approach was especially expected to cause no loss to the national treasury, but some loss is expected in the future, given the progress of the normalization process so far. A more fundaal problem is that KAMCO s purchase of a PF loan is not an ultimate purchase. The credit of suspended PF projects of mutual savings banks ultimately belongs to mutual savings banks, the purchasing agencies, in terms of profit and loss related to the collection of credit, which means that KAMCO s purchase was not a purchase in its true sense and was nothing but a lukewarm policy intended to maintain the soundness indicators of mutual savings banks including the BIS ratio for a short period of time from the Copyright 2015 SERSC 11

6 purchase date of the insolvent asset to the date of credit collection (ex-post settle) (Shin Jong-chil and Baik Min-seok, 2015) Improve Measures and Alternatives for the Normalization of Suspended PF Projects of Mutual Savings Banks If KAMCO resells the PF credit it purchased to its old mutual savings banks, a second scandal of mutual savings banks may take place. Mutual savings banks need to deposit allowances that account for 20% of the resale prices to repurchase the PF credit transferred to KAMCO, and those allowances can impose a considerable burden on the banks. The most effective solution to those problems is for KAMCO to actually purchase the insolvent PF credit of mutual savings banks instead of an ex-post settle condition and invest all of it into PFV established for business normalization. If financial institutions participate as the financial investors of PFV later, the normalization of those projects will generate more positive results. Another solution involves the activation of develop REITs, which is connected to the active normalization works of KAMCO as the asset manager of national treasury. REITs make invests into real estate develops and commission the invest, operation and manage of assets to an asset manage firm. KAMCO needs to take an active part in the projects as a developer by investing all of the credit acquired to normalize suspended PF projects of mutual savings banks and make a shift to the financial structure of actual PF credit acquisition contract with mutual savings banks rather than ex-post settle-conditional acquisition 4 Conclusion The research findings were as follows: first, the ex-post settle-conditional acquisition contract approach, which was identified as a problem with credit purchase between KAMCO and mutual savings banks through the analysis of normalization process of PF projects, should be replaced with an actual sales contract approach. Next, the study proposed the activation of KAMCO-led develop REITs to normalize the suspended projects and further activate the real estate market. Finally, the concerned subjects and agencies of real estate PF projects should put serious thoughts into these situations, in which approximately 700 establishs are suspended in construction, and engage in thorough analysis and bold impleation to prevent a vicious cycle of paying the loss of the establishs with the tax-payers precious money in the worst case. 12 Copyright 2015 SERSC

7 References 1. KO, B.S., KANG, D.Y., LEE, H.S., KIM, K.H.: A Study on a Method to Diversify the Members of Project Financing Vehicle for Large-scale Project Financing Project. Korea Institute of tion Manage Conference(2010) 2. Kwon, Y.S, Choi, W.H.: Regulation Improve Plan of Incomplete and Abandoned tion. Journal of Appraisal Studies. Vol.13, No.1. pp (2014) 3. BAIK, M.S.: Condominium Develop Project Feasibility Analysis Model. Korea Real Estate Research Institute Conference(2013) 4. PIN, J.I.: Insolvency of project financing and Crises in the construction industry. CERIK(2012) 5. Shin, J.C, Baik, M.S.: A Research on the Normalization Schemes for Insolvent Develop Site on Mutual Savings Bank. Journal of The Academia-Industrial Cooperation Society. Vol.16, No.1. pp (2015) 6. AHN, N.S.: Systems Thinking Perspective on the Collapse of Savings and Loan Banking System in Korea. Journal of the Korean System Dynamics. Vol.13, No.1(2012) 7. YANG, G.J.: An Exploratory Study on Project Financing of Korea Mutual Savings Bank. 企業法硏究, Vol.25, No.4(2011) 8. YOU, J.G., OH, D.H.: Efficient Manage Scheme for Insolvent Develop Site in Real Estate Project Financing. Journal of the Korea Real Estate Analysts Association. Vol.16, No.3(2010) 9. KAMCO.: Normalization Schemes for Insolvent Develop Site on Mutual Savings Bank(2011) 10. HWANG, J.Y.: Donga( ) Copyright 2015 SERSC 13