Government weighs public guarantees to keep reconstruction projects on track

With the government set to announce additional real estate supply measures imminently, officials are discussing a plan to have the Korea Housing Finance Corporation (HF) provide guarantees for supplemental relocation loans tied to urban renewal projects, industry sources said.

According to construction industry sources Monday, the government is reviewing a plan under which HF would create a new guarantee product for relocation loans as part of its upcoming supply package, aimed at easing the financing squeeze on urban renewal projects.

Under the current system, relocation loans for such projects require financial institutions to hold the association's land as collateral through a mortgage, along with a relocation loan guarantee from the Korea Housing and Urban Guarantee Corporation (HUG).

HUG's public guarantee reduces risk exposure for banks and allows borrowers to access loans at annual interest rates around 4 percent, comparable to standard mortgage rates.

However, the government's June 27 and Oct. 15 lending regulations cut the loan-to-value ratio in regulated zones such as Seoul from 70 percent to 40 percent and capped loan limits at between 200 million won and 600 million won ($423,000). Because these restrictions were applied uniformly to relocation loans as well, smooth lending has become difficult.

As a result, even with HUG guarantees, borrowers are receiving smaller loans than before, and multi-home owners are being shut out of financing entirely, causing some relocations to stall.

Large construction companies have been extending supplemental relocation loans through their own credit lines, but this applies only to select project sites and carries annual interest rates of 6 to 8 percent, significantly raising the burden on housing associations, according to industry officials.

In response, the government is considering having HF create a new guarantee product to support supplemental relocation loans for urban renewal projects, enabling borrowers to access financing at lower interest rates.

A proposal is also under discussion to change the collateral valuation basis for relocation loans — shifting from the pre-demolition asset value to the post-completion asset value — in order to raise loan limits.

The change would account for the fact that reconstruction and redevelopment complexes in northern Seoul tend to have low pre-demolition asset valuations, leaving relocation loan limits extremely tight.

Separately, the government is also discussing measures to ease loan regulations and expand new non-apartment housing construction.

The housing industry argues that the loan-to-value ratio for mortgage loans to housing sales and rental businesses in regulated zones is currently locked at zero, with only a one-time exception of up to 30 percent LTV available for initial construction financing. That amount is insufficient to cover construction payments and project financing repayments, making new builds difficult to proceed, the industry says.

In particular, purchases of homes slated for demolition for residential development purposes do not qualify even for the 30 percent LTV exception, in effect blocking all lending channels.

The construction industry has urged the government to allow mortgage loans for homes purchased by housing developers for new construction purposes, with a 70 percent loan-to-value ratio applied.