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Determining credit risk factors of real estate project finance loans in Korea

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Frame of Image cusing on unique loan features distinguished from the western financing tradition, tracing the boom and bust of REDPF market and examining the determining factors to influence the credit risk based upon 427 outstanding loans listed in four commercial banks at the end of 2010. Dependent variables are the dummy of delinquency and the ratio of bad loan allowance to outstanding loan amount. Model 1 concerning the ex-ante project information before the first drawdown contains four dummy constructs, i.e. syndication, project location, property type and loan guarantee by construction firm, and such numerical variables as the ETC (Equity-to-Cost) ratio, guaranteed loan amount, construction company’s credit rating and its ranking in the industry. Model 2 consists of the ex-post information after the first drawdown, e.g. current interest rate of loan, the delays of project schedule in land acquisition, building permit and start of presale as well as the substitution or credit event of construction company and the extension of maturity. In Model 1, the project's location and the credit score of construction firms appeared to be significant to influence the credit risk. The variables representing whether the firms enhanced the borrower's credit and how much they guaranteed seem partially significant in estimation. In Model 2, the delay of presale and guarantor's serious credit event seem significantly correlated with the higher credit risk of REDPFLs. Results imply that more conservative


Full Text
Title Determining credit risk factors of real estate project finance loans in Korea
Similar Titles
Material Type Reports
Author(English)

Kim, Jin

Publisher

[Seoul]:Seoul Development Institute

Date 2011
Event

글로벌 금융위기 이후 선진적 주택정책 패러다임 모색

Pages 21
Subject Country South Korea(Asia and Pacific)
Language English
File Type Documents
Original Format pdf
Subject Economy < Macroeconomics
Territorial Development < National Land Development
Holding KDI; KDI School of Public Policy and Management

Abstract

The purpose of this study is to describe the real estate development project finance (REDPF) system in Korea, focusing on unique loan features distinguished from the western financing tradition, tracing the boom and bust of REDPF market and examining the determining factors to influence the credit risk based upon 427 outstanding loans listed in four commercial banks at the end of 2010.
Dependent variables are the dummy of delinquency and the ratio of bad loan allowance to outstanding loan amount. Model 1 concerning the ex-ante project information before the first drawdown contains four dummy constructs, i.e. syndication, project location, property type and loan guarantee by construction firm, and such numerical variables as the ETC (Equity-to-Cost) ratio, guaranteed loan amount, construction company’s credit rating and its ranking in the industry. Model 2 consists of the ex-post information after the first drawdown, e.g. current interest rate of loan, the delays of project schedule in land acquisition, building permit and start of presale as well as the substitution or credit event of construction company and the extension of maturity.
In Model 1, the project's location and the credit score of construction firms appeared to be significant to influence the credit risk. The variables representing whether the firms enhanced the borrower's credit and how much they guaranteed seem partially significant in estimation. In Model 2, the delay of presale and guarantor's serious credit event seem significantly correlated with the higher credit risk of REDPFLs. Results imply that more conservative loan rating and corporate analysis as well as stricter management of project schedule are efficient ways to reduce the credit risk. Korea’s experience from REDPF loans depending on the presale system of real property units and construction companies’ loan guarantees can warn other countries of the tangible credit risk, specifically in the era of rapidly changing financial environment, due to hyper leverage of project as well as excessive reliance on third party’s loan guarantees.