Major Financial Groups' Real Estate Trusts Face Solvency Concerns with 80% Non-Performing Asset Ratio

Real estate trust companies affiliated with South Korea's four major financial holding groups are facing significant solvency risks, with their non-performing asset ratio averaging 80.38% as of the end of the first half of 2024. This marks an increase from 77.53% at the end of last year, signaling a worsening trend in asset quality.

The prolonged slump in the domestic construction market, exacerbated by a surge in unsold properties, the fallout from real estate project financing (PF) issues, and escalating construction costs, has placed these trust companies under considerable pressure. Real estate trusts typically classify their assets into five categories: normal, watch, fixed, doubtful, and estimated loss. Fixed, doubtful, and estimated loss categories are collectively considered non-performing assets.

Among the four major financial groups, Shinhan Asset Trust reported the highest non-performing asset ratio at 88.59% by the end of the first half. Hana Asset Trust followed with 85.67%, while KB Real Estate Trust and Woori Asset Trust both recorded ratios in the 73% range. All four companies are operating with non-performing asset ratios between 70% and 80%.

Analysts attribute the declining asset quality to the prolonged stagnation in the PF market and an increase in disputes related to "completion guarantee" land trust projects. In these projects, the trust company assumes the obligation to complete the construction if the builder fails to do so within the agreed timeframe. As construction projects face delays due to the real estate downturn and rising costs, lawsuits over these completion guarantees have become more frequent. The trust companies are increasingly injecting their own capital into troubled projects, leading to a significant rise in their non-performing asset ratios as they provision for potential losses.

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The slump in the sales market for income-generating real estate and the contraction of real estate project financing development projects continued in the first half. The real estate trust industry is focusing on managing lawsuits related to completion guarantees.