A prolonged funding squeeze in South Korea's real estate project financing (PF) market is rapidly eroding the housing supply base of small and mid-sized construction firms. Financial institutions have curtailed new PF lending since the Legoland crisis of September 2022, and the limited funds still available are concentrated in prime projects in the Seoul metropolitan area and at large builders. Combined with a slump in regional property markets, housing supply by smaller builders has dropped nearly 60% from pre-crisis levels.
Housing supply by members of the Korea Housing Builders Association, excluding rental units, fell 58.8% to 69,000 units last year from 169,000 units in 2021, the association said on the 27th. Over the same period, nationwide apartment presales tracked by Budongsan114 declined 34.3% to 195,553 units from 297,793 units. Supply from small and mid-sized builders contracted far faster than the market as a whole.
Their share of total presales also slid to 35.7% last year from about 57%. The drop of more than 20 percentage points has sharply diminished the role of smaller builders, which have long supplied housing in regional markets.
Behind the contraction is a continuing net outflow of money from the PF market. Financial firms have been winding down troubled projects and recovering existing loans without extending comparable amounts of new credit.
According to a recent report by the Construction & Economy Research Institute of Korea, financial institutions recovered or wound down 202.8 trillion won ($144.4 billion) in real estate PF over the two years from the second quarter of 2024 through the first quarter of this year. New PF extended over the same period totaled 141.5 trillion won ($100.8 billion). New lending stayed at roughly 70% of recovered amounts in all eight quarters, producing a net outflow of 61.3 trillion won ($43.7 billion) from the PF market.
The problem is that even the reduced pool of money is skewed toward select projects. Korea Investors Service analyzed about 3,600 PF projects worth 50 trillion won involving 51 securities firms and capital companies. It found that the outstanding main PF balance for apartment projects run by builders ranked within the top 100 by construction capacity nearly doubled to 15.7 trillion won in the first quarter of this year from 7.9 trillion won in the second quarter of 2024.
By contrast, the main PF balance for builders ranked outside the top 100 shrank by more than 90% to 500 billion won from 6.1 trillion won. The regional skew is also stark. The main PF balance for Seoul office projects more than quadrupled to 4.5 trillion won from 1.1 trillion won over the two years, while the balance for offices outside Seoul fell 20% to 400 billion won from 500 billion won.
Structural weaknesses in domestic PF are also driving money toward large builders and prime metropolitan projects. Developers put up equity equal to just 2% to 5% of project costs, leaving many sites dependent on credit support from their contractors. As financial firms grow more risk-averse, projects run by smaller builders with relatively weaker credit are losing out in the allocation of funds.
"Before the Legoland crisis, PF loans were often extended without much in the way of guarantees, but since then even large construction firms are asked for double or triple layers of credit support," an industry official said. "Projects run by small and mid-sized builders, whose capacity to assume debt is relatively weaker, inevitably get pushed to the back of the line."
The long slump in regional property markets is widening the gap. Prices and buying demand are recovering for Seoul offices and metropolitan-area apartments, helped by supply shortages and a tight lease market, while unsold completed homes in the regions number about 25,000 units. For financial institutions, the structure creates a growing incentive to steer funds toward prime metropolitan projects to manage asset quality.
The industry is paying particular attention to the contraction in bridge loans. Used for land purchases and permits, bridge loans provide the early-stage money needed before full development begins and determine future housing supply. With funding drying up at this initial stage, builders say it is becoming difficult even to originate new projects. The Korea Investors Service survey found bridge loan balances at about 10 trillion won in the first quarter, down 5 trillion won from two years earlier.
Analysts say an increase in supply by smaller builders this year is also hard to read as a sign of improving conditions. Their cumulative supply reached 55,016 units as of September, up about 19% from a year earlier. But much of that came from pushing out presales at existing projects that had already secured permits, which differs from a net increase in supply driven by new project expansion.
Permit volumes, an indicator of future supply, are also declining. Cumulative housing permits nationwide through July totaled 142,328 units, down about 8% from a year earlier, according to the Ministry of Land, Infrastructure and Transport. That is 51.9% below the roughly 294,000 units recorded in 2022.
Business closures are also rising as the funding crunch and construction slowdown persist. A total of 641 general construction firms nationwide filed for closure this year, according to the ministry, up 32.4% from 484 in the same period last year.
Through its Aug. 13 housing supply package, the government expanded public PF guarantees to 86 trillion won ($61.2 billion) and increased special guarantees for small and mid-sized builders. But industry figures say policy support is unlikely to translate directly into new project expansion as long as financial firms remain conservative on PF and regional property markets stay depressed.
"Financial institutions have been extremely conservative on PF since the Legoland crisis, and in the regions even bridge loans at the earliest stage are completely blocked," an official at the Korea Housing Builders Association said. "If the funding freeze in the housing construction industry is not resolved, the housing supply shortage could drag on."
An official at the Construction & Economy Research Institute of Korea added: "The credit risk reduced by the government's public guarantees needs to translate into lower actual funding costs and better financing terms. PF feasibility assessments also need to be upgraded to reflect not only short-term presale rates but also rental income, long-term vacancy risk and effects on regional economies."
