After 450 Billion Won in 'Property Shopping' in Central Seoul in Just Two Months, Hanwha Wants "One More"... How Will It Raise the Funds? [Why&Next]

KRW 450.2 Billion for Sunhwa Building and Sinsa-dong Site

Also Pursuing Joint Acquisition of Boryung Building

Lending to Development Company and Providing Debt Support

Hanwha Galleria Faces Growing Financial Risks

Hanwha Galleria is facing increasing financing pressure as it buys buildings in central Seoul and development sites in Gangnam one after another. The two latest deals alone, involving Sunhwa Building in Jung-gu, Seoul, and a site in Sinsa-dong, are worth a combined 450.2 billion won. The company is also pursuing a joint acquisition of Boryung Building in Jongno. Led by Kim Dongseon, president of Hanwha Machinery & Service Holdings (M&S), the company appears to be accelerating its business diversification. As development projects and large-scale redevelopment investments continue, securing investment funds and managing debt have emerged as key challenges.

According to industry sources on November 12, Hanwha Galleria formed a consortium with Koramco Asset Trust and participated in the bidding to acquire Boryung Building in Jongno-gu, Seoul. The consortium was selected as the preferred negotiating party. The office building, located on Changgyeonggung-ro, has seven basement levels and 18 floors above ground. Korea Land Trust acquired it for about 160 billion won through a real estate investment trust in 2024. Hanwha Galleria said that the specific structure and scale of its investment, as well as its future business plans, have not been finalized.

Kim Dongseon, president of Hanwha Machinery & Service Holdings (M&S).

More than 500 billion won in real estate investments this year alone... Exceeding 20% of total assets

In June, Hanwha Galleria agreed to buy Sunhwa Building in Jung-gu, Seoul, for 213.5 billion won. In July, it won the bid for the former site of The Peak Dosan in Sinsa-dong, Gangnam-gu, for 236.7 billion won. The two deals total 450.2 billion won, equivalent to 22.1% of the company’s consolidated total assets of 2.0408 trillion won at the end of June this year. The investment scale will grow further if the joint acquisition of Boryung Building is completed. However, the actual investment in Boryung Building will depend on Galleria’s share of the acquisition.

Hanwha Galleria decided to buy Sunhwa Building to secure office space and increase the value of its assets over the medium to long term. It acquired the Sinsa-dong site for a development project. The company recently established a Real Estate Development Office directly under the CEO. Executive Vice President Gu Yongchan, a former CEO of DS Industrial Development, was appointed to lead the office.

The company is funding its investments through a combination of its own resources and borrowing from financial institutions. When it purchased Sunhwa Building, the company disclosed that it would pay the full amount in cash on August 31 and cover the cost with its own funds and loans from financial institutions. The purchase price of 213.5 billion won was about 5.7 times the 37.4 billion won in cash and cash equivalents held by the head office on a non-consolidated basis at the end of June. The amount was too large to be covered by the cash it held at the time.

The Sinsa-dong development will be funded through both financial support from the head office and external borrowing by the project company. The project is being pursued by High End Dosan PFV, a project financing vehicle (PFV) established in August with paid-in capital of 5 billion won. A PFV is a project company set up to develop a specific property and manage the project’s assets, contracts, and borrowings. Hanwha Galleria agreed to lend the PFV 55 billion won at an annual interest rate of 4.6% for project costs, including the assumption of the land contract deposit and the remaining payment. According to the PFV’s disclosure, the loan is due on December 31, 2031, and may be repaid early.

The PFV separately entered into a 210 billion won loan agreement with external lenders. The PFV provided the land as collateral, while Hanwha Galleria also pledged 940,000 shares in the PFV that it holds as additional collateral. Hanwha Galleria also entered into agreements to provide funds and to assume debt under certain conditions. This means that if the conditions set out in the agreements are met, it may have to provide any funding shortfall or take over the debt. In other words, the development company is borrowing money, while the head office is also providing financial and credit support.

Turned profitable in the first half, but securing capacity for further investment remains a challenge

Hanwha Galleria’s consolidated debt-to-equity ratio rose from 123.7% at the end of 2023 to 144.6% at the end of last year. It fell to 140.5% at the end of June this year, but total liabilities remained nearly unchanged at about 1.1922 trillion won, compared with 1.1924 trillion won at the end of last year. The lower debt-to-equity ratio was driven more by an increase in equity, reflecting net income and valuation gains on financial assets, than by a reduction in debt.

However, the company’s first-half results and cash flow improved. Consolidated revenue for January-June this year was 277 billion won, up 8.1% from the same period last year. Operating profit turned around from a loss of 2.9 billion won in the first half of last year to a profit of 27.5 billion won. Cash flow from operating activities also shifted from a net outflow of 8.5 billion won to a net inflow of 56.1 billion won.

The problem is that the company still has limited cash available for additional investment. After paying about 15.4 billion won in interest and about 17 billion won in lease principal for stores, facilities, and other assets out of the 56.1 billion won generated from operating activities, about 23.7 billion won remained. During the same period, investing activities recorded a net outflow of 27.9 billion won, exceeding that amount.

Most of the funds raised through borrowing were also used to repay existing debt. The company raised 376 billion won through loans and bonds in the first half, but repaid 370.5 billion won, leaving net proceeds of about 5.5 billion won. At the end of June, loans and bonds totaled 282.7 billion won, excluding lease liabilities. After these cash inflows and outflows, cash on hand increased by only about 600 million won, from 56.5 billion won at the end of last year to 57.1 billion won at the end of June.

These figures predate the full impact of the real estate investment burden in the second half of the year. Concerns have emerged that financial pressure could increase once the payment for Sunhwa Building and funding support for the Sinsa-dong development company are reflected.

Demand for investment over the medium to long term is also on the horizon. The Apgujeong luxury department store plans to more than double its sales area, from 27,438 square meters to 59,504 square meters, through a complete reconstruction. The investment is reportedly expected to total about 900 billion won, with completion anticipated around 2032-2033. The use of existing assets could be a factor in securing funds. Hanwha Galleria is considering various options, including selling its Timeworld store in Daejeon. Timeworld is Galleria’s second-largest store and recorded total sales of 603.2 billion won last year. The company says that no decision has been made on whether to sell the store or on any terms of a potential sale.

A Hanwha Galleria representative said, “We plan to develop real estate development into one of our new business pillars,” adding, “We are reviewing the investment feasibility and our financial capacity, with advice from external evaluation institutions, before proceeding.”

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