🚨 Strengthening Loan Negotiation Power of Reconstruction Associations and Market Changes
Today Korean Economic News | 2025.02.02
📌 "We'd Rather Find Another Lender"... Reconstruction Associations 'Threatening'
💬 With interest rate cut expectations this year, the atmosphere in reconstruction and redevelopment project sites is also changing. Some reconstruction and redevelopment associations are even threatening financial companies that demand high spreads, saying, "We'd rather find another lender." In the improvement industry, there is a growing possibility that a loan structure different from the existing practice, where financial companies held the upper hand, will form.
1️⃣ Simple Explanation
The interest rate cut expectations are changing the landscape of the real estate market. There's a shift in the balance of power between reconstruction/redevelopment associations and financial institutions, and I'll explain what this means in simple terms.
Reconstruction or redevelopment projects require a lot of money. Demolishing old buildings, designing new apartments, and installing infrastructure costs tens or even hundreds of billions of won. Since the contributions from association members (residents) are not enough, most reconstruction and redevelopment associations proceed with their projects by taking out loans from financial institutions.
Until now, financial institutions have been in the dominant position in these loans. As the real estate market stagnated and interest rates rose, financial institutions were reluctant to lend money to reconstruction and redevelopment projects, and even when they did, they demanded high spreads (additional interest rates on top of the base rate). From the perspective of reconstruction associations, they had no choice but to accept these high interest rates as a necessary evil.
But recently, the situation has been changing. As expectations grow that the Bank of Korea will start cutting interest rates, the reconstruction and redevelopment market is regaining vitality. This is because when interest rates fall, project costs decrease, and the demand for new apartments is likely to increase.
Amid these changes, reconstruction and redevelopment associations are strengthening their negotiating power with financial institutions. They can now say, "If you insist on high interest rates, we will find another financial institution." Just like individual consumers looking for better mortgage terms among several banks, associations are also seeking loans with better conditions.
These changes can affect the overall real estate market beyond simply changing the cost structure of reconstruction and redevelopment projects. Reduced project costs can help stabilize the prices of new apartments, and there's a greater possibility that more reconstruction and redevelopment projects will be pursued. Ultimately, this can lead to improved urban residential environments and expanded housing supply.
2️⃣ Economic Terms
📕 Urban Improvement Projects
Urban improvement projects refer to reconstruction and redevelopment projects to improve old residential areas.
- Reconstruction involves demolishing old buildings and constructing new ones, while redevelopment is a project to improve deteriorated areas within a city.
- Projects are pursued by forming associations, and go through procedures such as safety inspections, association establishment, project implementation approval, management disposition approval, groundbreaking, and completion according to the project stage.
📕 Spread
The spread is an additional interest rate charged on top of the base rate, referring to the interest rate that lending institutions add considering risk.
- It varies according to the creditworthiness of the borrower, project risk, collateral value, etc., and directly affects the financial institution's rate of return.
- For reconstruction and redevelopment projects, the spread is determined considering the project stage, location, profitability, etc.
📕 Interest Rate Cut
Interest rate cut refers to a policy where the central bank lowers the base rate.
- It is implemented to promote consumption and investment during economic slowdowns and affects overall market interest rates.
- Interest rate cuts have a positive impact on the real estate market, with effects of decreased loan costs and increased purchasing power.
📕 Association Loans
Association loans refer to funds borrowed by reconstruction and redevelopment associations from financial institutions to proceed with projects.
- They are used to cover initial project costs such as demolition costs, design fees, and various administrative expenses.
- The loan size, interest rate, repayment conditions, etc. vary depending on project viability and market conditions, and greatly affect project risk.
3️⃣ Principles and Economic Outlook
💡 Interest Rate Cut Expectations and Real Estate Market Changes
With growing expectations for interest rate cuts this year, the mood in the real estate market, especially the reconstruction and redevelopment market, is changing.
First, looking at the background of interest rate cut expectations, the Bank of Korea is currently maintaining a base rate of 3.50% per annum, but the possibility of starting interest rate cuts in the first half of the year is increasing, considering concerns about economic slowdown and price stability trends. The US Federal Reserve is also expected to begin interest rate cuts this year, which is anticipated to influence Korea's monetary policy. The market is already reflecting expectations for interest rate cuts, with corporate bond rates and long-term government bond rates showing a downward trend, which is also affecting real estate-related loan rates.
Second, looking at the impact of interest rate declines on the real estate market, interest rate cuts act as a factor boosting housing purchasing power and stimulating investment demand. When mortgage interest rates decrease, it's possible to borrow more with the same repayment ability, making it likely that housing demand will increase. Additionally, as returns on safe assets like deposits decrease, the relative attractiveness of real estate investment increases. These changes are already manifesting as increased housing transaction volumes in previously stagnant markets and signs of price increases in some regions.
Third, looking at the impact of these environmental changes on the reconstruction and redevelopment market, interest rate declines can lead to improved project viability. There is an effect of reduced financial costs during the project promotion process and decreased project risk as demand in the post-completion sale market is expected to increase. This can serve as an opportunity for improvement projects that have been delayed or suspended to regain vitality. In particular, there are observations that the will to promote projects is strengthening among reconstruction and redevelopment associations in the early project stages.
Fourth, considering the long-term market outlook, if the interest rate cut cycle intensifies, the recovery trend in the real estate market is likely to become more pronounced. However, since other variables such as household debt burden, demographic changes, and the direction of government real estate policies also play a role, a gradual recovery is expected rather than rapid price increases as in the past. The reconstruction and redevelopment market is also expected to show clearer differentiation based on location and project viability, with selective recovery centered around high-quality project sites.
These changes in the interest rate environment are also affecting the dynamics between major participants in the real estate market. In particular, the balance of power between reconstruction/redevelopment associations and financial institutions is changing, which is expected to bring changes to the way improvement projects are promoted and their financial structures in the future.
💡 Factors Strengthening the Negotiation Power of Reconstruction and Redevelopment Associations
Several factors are working together in the background that has allowed reconstruction and redevelopment associations to strengthen their negotiating power with financial institutions.
First, increased liquidity in the financial market and intensified competition for loans are major factors. As expectations for interest rate cuts grow, financial institutions are strengthening efforts to find profitable lending destinations. In particular, banks are seeking new lending areas due to household loan regulations and decreased corporate loan demand from economic slowdowns, with viable reconstruction and redevelopment projects emerging as important alternatives. Additionally, competition is intensifying as non-bank financial institutions such as insurance companies, securities firms, and real estate finance specialized companies actively participate in the improvement project loan market. In this environment, reconstruction and redevelopment associations have greater room to choose financial institutions offering more favorable terms.
Second, there is a spreading perception that the risks of improvement projects have decreased compared to the past. Improvement projects after the mid-2010s have become more systematic and specialized in their project promotion procedures compared to the past, with reduced uncertainty in the project promotion process. Also, government deregulation and support policies have made project promotion easier. In particular, recently, as large construction companies and contractors increasingly participate in improvement projects from the early stages, project stability is increasing, and financial institutions' risk perception is improving. This provides a basis for financial institutions to lower the spread on improvement project loans.
Third, the profitability outlook for reconstruction and redevelopment projects is improving. Despite the real estate market downturn in recent years, reconstruction and redevelopment apartments in Seoul and major metropolitan areas still form high price premiums. As the possibility of housing market recovery increases with interest rate cut expectations, the outlook for post-completion sales revenue is also improving. Additionally, medium to long-term demand for improvement projects is expected to increase due to the increasing proportion of old housing and expanded policy interest in urban regeneration. These factors increase the profitability and stability of improvement projects, providing a basis for associations to demand favorable terms during loan negotiations.
Fourth, the financial understanding and negotiation capacity of reconstruction and redevelopment associations are strengthening. In the past, association members often had a low understanding of finance and accepted conditions presented by financial institutions as is, but recently financial capacity has greatly strengthened through the participation of financial experts within associations, external expert advice, and active information sharing. In particular, as loan cases and conditions from other associations are quickly shared through the internet and SNS, associations can more accurately grasp the appropriate interest rate levels forming in the market. The expanded role of financial advisors and project management (PM) companies representing associations is also an important change that has made professional financial negotiations possible.
As these factors work together, reconstruction and redevelopment associations have gained the negotiating power to 'threaten' saying, "We'd rather find another lender." This signifies a paradigm shift in the improvement project finance market and suggests the possibility of lower interest rates and more flexible loan conditions in the future.
💡 Changes in Improvement Project Financial Structures and Market Impact
As the possibility grows for loan structures different from the existing practice where financial companies held the upper hand, various changes are expected in the improvement project finance market and the overall real estate market.
First, improvement in improvement project loan interest rates and conditions is expected to accelerate. With strengthened association negotiating power, there is a high possibility that loan conditions will improve in favor of associations, with spread decreases, expanded loan limits, and more flexible repayment conditions. Particularly for high-quality improvement project sites with good viability, cases of securing lower interest rates through competitive bidding between financial institutions are expected to increase. Already, there are reports of some reconstruction complexes in Seoul's Gangnam area completing loans with lower-than-expected spreads (2-3% level), and this trend may spread to other regions.
Second, improvement project finance structures and participants are expected to diversify. More diverse financial institutions will participate in the improvement project loan market, which was previously dominated by commercial banks or a few large financial companies. In particular, insurance companies, securities firms, real estate finance specialized companies, and financial subsidiaries of large construction companies are expected to actively enter the market. Also, hybrid financial structures are expected to spread, moving away from the method where a single financial institution provides the entire loan, with multiple financial institutions forming consortiums or different financial institutions participating by stage. This provides an opportunity for financial institutions to diversify risk and for associations to secure more favorable conditions.
Third, improvement project promotion speed may accelerate, and project scale may expand. As finance procurement becomes easier and costs decrease, projects that have been delayed due to funding difficulties may regain vitality. In particular, project promotion may accelerate as procurement of costs needed in the early project stages such as safety inspection costs, design costs, and relocation costs becomes smoother. Additionally, as project viability improves due to reduced financial costs, there is a possibility that improvement projects in small and medium-sized complexes or provincial cities may also be activated. This is a positive change that can lead to expanded housing supply and promotion of urban regeneration.
Fourth, the transparency and professionalism of improvement projects are expected to strengthen. While competing, financial institutions will demand project transparency and professional management for risk management. This can lead to enhanced transparency in association operations, expanded roles for professional PM companies, and the introduction of systematic project management systems. Additionally, as information asymmetry between financial institutions and associations decreases, more rational and objective project evaluation and risk management become possible. These changes can be factors that increase the stability and success possibility of improvement projects in the long term.
These changes in improvement project financial structures are likely to have a positive impact on urban regeneration, housing supply, and real estate market revitalization beyond simply decreasing loan costs. However, a balanced approach from financial authorities and market participants is needed to ensure that excessive loan competition does not lead to neglect of risk management.
4️⃣ In Conclusion
The phenomenon of strengthened loan negotiation power of reconstruction and redevelopment associations amid interest rate cut expectations is an important signal showing that the flow of the real estate market is changing. The 'threat' from associations saying, "We'd rather find another lender," signifies a paradigm shift in the improvement project finance market beyond a simple negotiation tactic. These changes are expected to have a positive impact on activating improvement projects and housing market recovery.
From the perspective of reconstruction and redevelopment associations, there is a need to actively utilize these market changes. Unlike in the past, strategies to secure optimal financial conditions by comparing proposals from various financial institutions and inducing competitive bidding will be effective. Also, it's important to strengthen loan negotiation power by actively utilizing financial advisors or professional PM companies, and to continuously monitor the latest financial information and market trends. By enhancing project transparency and professional management, associations can gain the trust of financial institutions and secure more favorable conditions.
From the perspective of financial institutions, a new approach is needed to adapt to the changing market environment. Rather than simply adhering to high spreads, strategies are required to precisely analyze risks by project stage and provide differentiated financial solutions accordingly. Additionally, there is a need to secure competitiveness through building long-term partnerships with associations, providing additional services, and designing flexible loan structures. Financial institutions that accurately understand the characteristics and risks of improvement projects and have expertise are likely to have an advantage in the market.
The role of the government and policy authorities is also important. While continuing to rationalize regulations and support policies for activating improvement projects, appropriate monitoring and guideline provision are necessary to prevent excessive financial risk increases. In particular, it's important to prevent the possibility of bad loans due to excessive competition between financial institutions and to establish institutional devices for protecting association members and ensuring project stability.
For housing market participants, these changes suggest the possibility of increased housing supply and accelerated urban regeneration in the medium to long term. In particular, interest and investment may increase in areas with concentrations of old apartments or high redevelopment potential. However, as differentiation by region and project site is expected to become more pronounced, careful analysis of location and project viability is necessary.
In conclusion, the strengthened loan negotiation power of reconstruction and redevelopment associations can be seen as a positive signal for real estate market recovery and urban regeneration activation. For these changes to develop in a sustainable and sound direction, a balanced approach and responsible attitude from market participants are important. At this point, constructive cooperation between associations, financial institutions, and the government is required for the macroeconomic environmental change of interest rate cuts to lead to efficient reorganization of urban space and improvement of residential environments.