hankyoreh

(courtesy of ClipartKorea)

Analysts say that the scale of the domestic real estate market’s “shadow banking” activities has soared nearly 90 percent in three years to exceed 200 trillion won. As tightening the purse strings has begun in earnest both in Korea and abroad, experts are sending warning signals for real estate investment goods.

According to a report published Sunday by Shyn Yong-sang, a senior research fellow at the Korea Institute of Finance, the scale of the domestic real estate market’s shadow banking activities reached a record high of 750.3 trillion won as of the end of January.

Real estate shadow banking refers to real estate financial investment products such as real estate funds, trusts, and project finance (PF) loans that fall outside the official banking system and are not subject to usual regulations. Due to prolonged low interest rates, market funds that could not find an investment destination flowed into such shadow banking products.

According to the report, the scale of finances connected to shadow banking that could shock the entire financial sector is estimated to be worth 202.6 trillion won, or 27 percent of the total. Such shocks could mainly be the result of insolvency and repurchases in the wake of future real estate fluctuations. Compared to the 107.4 trillion won recorded at the end of 2018, this figure has jumped by 88.6 percent.

As a result, there are concerns that if the real estate market is adjusted due to the recent global financial retrenchment policies, the return on these products will fall, increasing the risks to investors as well damaging asset quality in the industry.

In terms of specific products connected to this shadow banking sector, overseas real estate funds accounted for the largest proportion, at 67.6 trillion won. These funds carry a high level of risk since they are exposed to foreign exchange risks as a result of the complicated interests of domestic and foreign sellers, managers, and agencies, as well as different trading practices and legal systems in the investment target countries. This further highlights the need to check in advance the kinds of risks involved when dealing with each specific country.

In the case of PF loans, analysts say the highest risk is hidden in loans (36.1 trillion won), not including banks and insurance policies. This is because small- and medium-sized stock firms and credit companies have been aggressively expanding PF loans amid the booming real estate market, which could lead to financial soundness being undermined if the value of investment assets declines.

Asset-backed securities (38.3 trillion won) and guarantees of obligation (37.4 trillion won) linked to PF loans are also at risk of insolvency. In particular, the report pointed out that securitized products expire in less than three months, so instability in the market could directly lead to a market liquidity crisis affecting stock firms.

Furthermore, the rapid increase in mutually linked transactions between these trading firms and asset management companies, which have become vulnerable to external shocks, has led to an increased possibility of such risk spilling over into the wider financial sector, including the banking sector.

In real estate trusts, the risk of leveraged land trusts and management trusts linked to completion responsibilities (22.3 trillion won), inevitably increases the risks for trust companies since they are obligated to complete such projects. In reality, many retirement pensions adopt this kind of trust fund framework.

“The domestic real estate market is highly likely to undergo adjustment due to interest rate hikes and expansion of supply,” says Shyn, suggesting that “monitoring and management of the risks of shadow banking products should be strengthened.”

By Han Gwang-deok, finance correspondent

Please direct questions or comments to [english@hani.co.kr]