South Korean banks see 10-year high in real estate loan defaults

Delinquency rates in South Korea's real estate sector have surged to their highest levels in a decade across major commercial banks, fueled by a combination of high interest rates and a prolonged downturn in the property market. IBK Industrial Bank of Korea (IBK) recorded a particularly stark increase, with its delinquency rate for small and medium-sized real estate and rental businesses reaching 1.54% in the second quarter of this year. This figure marks the highest point since the third quarter of 2012, when the rate stood at 2.02%, and represents a significant jump from both the previous quarter and the same period last year.

Other sectors are also showing elevated delinquency rates. The rate for small and medium-sized wholesale and retail businesses climbed to 1.11% in the second quarter, the highest since data collection began in 2011. The construction industry continues to grapple with high rates, hovering around 1.32% in the second quarter, following 1.64% in the first.

Major commercial banks are also experiencing this trend. Shinhan Bank's delinquency rate for real estate and rental businesses hit 0.42% by the end of the second quarter, the highest since the first quarter of 2021 when such data began to be compiled. Woori Bank's rate reached 0.62%, the highest since the first quarter of 2016. Hana Bank's rate also stood at 0.57%, nearing its 2016 peak.

Bank officials attribute the rising delinquencies to a confluence of factors. Increased business closures among self-employed individuals have led to reduced rental income. Simultaneously, the stagnant commercial real estate market makes it difficult for property owners to sell assets. Compounding these issues, high interest rates make it increasingly challenging for landlords to service their loan obligations. The Bank of Korea has flagged the real estate sector as a "cautionary industry" due to its sluggish growth over the past two to three years, emphasizing the need for stringent asset quality management.

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The delinquency rate is rising because landlords are unable to service their loan interest due to decreased rental income from increased self-employed business closures and difficulties in selling assets due to the sluggish commercial real estate market.