Yangjae Open Market Units Fail to Sell After 5 Auctions... Daewoo E&C Faces Uncertain Recovery of 18 Billion Won Loan

46 Retail Units Fail to Sell after Five Auction Attempts
Total Minimum Sale Price Drops from 11.7 Billion Won to 3.8 Billion Won
Daewoo Engineering & Construction Faces Difficulty Recovering PF Loan Compensation

Daewoo Engineering & Construction put up the ‘Hybrand’ multi-use shopping center in Yangjae-dong, Seocho-gu, Seoul for auction in an effort to recover a project financing (PF) loan of 18 billion won that it had repaid on behalf of the project developer. However, it has struggled to find a buyer. After five failed auctions, the minimum selling price has dropped to around 30% of the original appraised value. Considering the presence of higher-priority creditors, analysts suggest that Daewoo Engineering & Construction is unlikely to recover the full amount of its loan.

According to GGI Auction on September 30, the sixth round of auctions for 46 open market retail units within the Hybrand complex in Yangjae-dong will take place at the Seoul Central District Court on October 13. These units served as collateral when Daewoo Engineering & Construction, the construction company, provided a joint guarantee for a PF loan to Company A, the project developer, in 2016. Previously, Daewoo Engineering & Construction repaid the loan on behalf of Company A and later claimed indemnity against the developer. However, after the developer failed to fulfill its debt obligations, both the senior creditor Industrial Bank of Korea (IBK) and subordinated creditor Daewoo Engineering & Construction proceeded to seek a court-ordered auction of the property.

'Open market' retail units are a type of commercial space commonly seen in multi-purpose shopping centers and underground malls, such as ‘Doota’ in Dongdaemun and ‘Migliore’ in Myeong-dong. These are shops that operate in open spaces without partition walls, and a large supply of such units entered the market from the late 1990s through to the 2000s when multi-purpose shopping centers were popular. Recently, with retail districts shifting focus toward online and the general economic slump, most such units continue to fail at auction, with repeated unsuccessful bids.

The Hybrand retail units have also failed to attract buyers through five auctions, with the minimum total selling price dropping to only about 33% of the initial appraised value. The aggregate appraised value for the 46 units originally summed up to 1.17 billion won, with individual unit prices ranging from 81 million won to as much as 940 million won depending on the size. With each failed auction, a reduction rate of 20% is applied to the previous sale price. As a result, the current cumulative minimum sale price for all units has fallen to 3.83 billion won. On an individual basis, a 35.5㎡ (approx. 10 pyeong) retail unit with an original appraisal of 940 million won now has a minimum price of 380.1 million won, and a smaller 10.6㎡ (approx. 3.2 pyeong) unit that was appraised at 81 million won has fallen to 26.54 million won.

Even if all 46 units are sold at the sixth auction, it appears unlikely that Daewoo Engineering & Construction will be able to recover its loan. Industrial Bank of Korea is the senior creditor on these retail units, holding a secured claim of 11.52 billion won against the collateral provided by Company A. Daewoo Engineering & Construction is the secondary creditor, holding a secured claim of 18.226 billion won. If all units are sold at the lowest court-permitted price (the minimum sale price) in the sixth auction, proceeds would total just 3.83 billion won. Once the senior creditor, Industrial Bank of Korea, receives distribution from the auction proceeds, it means there will effectively be nothing left for Daewoo Engineering & Construction to recover.

Daewoo Engineering & Construction has determined that its claim against the project developer is unrecoverable and has recognized it as a bad debt. A company official explained, "We concluded, even before the start of the auction process, that recovering these receivables was impossible, so it was already treated as a bad debt."

The repeated auction failures for Hybrand are seen as a telling example of the challenges facing office and retail commercial properties in the Greater Seoul area. According to GGI Auction, there were 7,250 commercial property auctions conducted across the country this month alone. However, the successful bid rate was a mere 19.9% (1,442 cases). This is far lower than the annual commercial property sale rate of 31.6% recorded in 2021 during the COVID-19-induced downturn. The auction price ratio, which represents the final winning bid level against the appraised value, also plummeted from 73.8% in 2021 to just 49.8% this month.

Experts predict that more commercial properties with joint collateral arrangements will hit the auction market simultaneously as the economic downturn continues. However, with demand for successful bids on retail space rapidly declining, it will be difficult for creditors to recover their receivables through distribution of auction proceeds. Eunhyun Kang, head of the auction research center at Lawfirm Myungdo, commented, “Commercial property is closely tied to the economy, so when the market slumps, more borrowers are unable to repay loans, resulting in creditors resorting to judicial sale. But lately, it's rare for retail units to sell at their original appraisal price, so creditors are often unable to recover the full amount they have lent.”

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