[Exclusive] Two-Year Delay in Labeling PF Projects as ‘Distressed’ and Tightening Second-Tier Lending... Wave of Regulatory Deferrals to Accelerate Housing Supply

Delayed Implementation of Stricter Soundness and Provisioning Rules in Viability Assessments
Two-Year Postponement for PF Loan Risk Weights at Savings Banks and Credit-Specialized Firms
Easing PF Funding Constraints to Stimulate Housing Supply

Financial authorities have decided to postpone by two years the implementation of stricter soundness assessments and increased reserve requirements for real estate project financing (PF) projects where developers have low equity capital. Plans to introduce new risk weights for PF loans at savings banks and specialized credit financial companies are also set to be deferred by two years. While authorities continue to handle distressed PF projects, they intend to support healthy or potentially viable projects with adequate funding to stimulate housing supply in Seoul and the metropolitan area. This move serves as a follow-up measure to support the "August 13 Real Estate Measures," which are focused on speeding up housing supply.

Two-Year Deferral on Stricter PF Business Feasibility Assessments and Reserve Regulations

According to financial authorities on September 2, the Financial Services Commission and the Financial Supervisory Service have decided to delay by two years—until 2029 instead of 2027—the implementation of a system that incorporates developers' equity ratios into PF project feasibility assessments, thereby differentiating site evaluation ratings and reserve accumulation levels.

Initially, the authorities had planned to add the amount of “own capital” invested by developers as a key measure for determining the soundness of PF projects. Since the average equity ratio of local developers is only about 3%, the intent was to address industry practices of operating projects with minimal capital while relying mainly on borrowed funds.

Under the previous plan, starting next year, an equity ratio under 5% would be rated as "normal," under 3% as "attention," and under 2% as "at risk of insolvency." The standards would then be gradually tightened so that by 2030, projects with equity ratios below 20% would be labeled "normal," below 10% as "attention," and below 2% as "at risk of insolvency." With this latest deferral, the schedule for such measures will be pushed back by two years.

The authorities have opted to moderate the pace because the results of such project assessments directly affect the flow of funds to PF sites. If a project's rating drops, financial companies must accumulate higher reserves, and developers could have greater difficulty obtaining new financial support or extending existing loans. Since the earlier plan to raise the equity requirements for residential PF developers from 5% in 2027 to 20% in 2030 has now been delayed by two years, the timeline for related feasibility assessments and reserve regulations is also being pushed back to avoid institutional misalignment.

Postponement of New Risk Weights for PF Loans at Savings Banks and Specialized Credit Finance Companies; Review of Bridge Loan Regulations

Financial authorities are also considering applying the new risk weights for savings bank and specialized credit financial company PF loans starting from 2029, not 2027. Risk weights are essentially "risk scores" assigned by financial institutions to loan assets—the higher the risk weight, the more capital the lender must set aside for the same loan amount, which in turn reduces their lending capacity.

Currently, PF loans at banks carry a 150% risk weight. Authorities had planned to categorize this by equity ratio and sales rate, setting it between 100% and 150%, while also introducing the same regulations to savings banks and specialized credit financial companies. For banks, the reform would offer incentives by reducing capital requirements for sound PF loans; for savings banks and specialized credit firms, however, it would impose new capital restrictions, raising concerns throughout those industries.

An official from the authorities explained, "The impact of risk weights differs by sector, so besides a blanket two-year postponement, we are also considering various alternatives."

As of March, the outstanding balance of PF loans in the financial sector was KRW 115.5 trillion. Of this, savings banks held KRW 6.9 trillion, and specialized credit financial companies held KRW 20.2 trillion. Combined, these two types of institutions accounted for KRW 27.1 trillion, about 23.5% of all PF loans. Delaying the introduction of new risk weights is expected to reduce capital burdens for these sectors and increase their ability to supply funds to PF projects.

The authorities are also discussing ways to ease the requirements for extending maturity on bridge loans, which are short-term loans prior to full-scale PF. Currently, to extend the maturity on even a fully performing bridge loan more than twice, developers must obtain a PF feasibility assessment by an external professional agency and secure approval from at least three-quarters of the lenders. Industry participants have requested relaxed conditions, arguing that even sound projects face difficulty renewing loans. The authorities are also reviewing this issue.

The underlying reason for moderating the pace of stricter PF regulations is the urgent need to increase housing supply. While the mid-to-long-term policy directions of resolving distressed PF projects and improving the low-capital, high-leverage structure of developers remain in place, authorities aim to prevent funding bottlenecks from delaying the start and delivery of new housing, especially for sites that are healthy or on the path to normalization.

Lee Chanjin, Governor of the Financial Supervisory Service, also instructed all resources to be mobilized for early, large-scale housing supply in a management meeting held the previous day. The FSS plans to specially monitor 325 major PF sites in the metropolitan area scheduled to provide housing by 2027. Dedicated personnel will be assigned to each site to closely track project progress and funding conditions. Additionally, from the previous day, a new "PF Finance Support Center" began operations to gather industry opinions and pursue necessary institutional improvements.

This content was produced with the assistance of AI translation services.