[Viewpoint] The end of the property boom?Real estate used to be a prized asset for companies. But lately, corporations are showing a change of attitude. They no longer seem to want to own property. Earlier this year, Hyundai Development Co. said it would focus on overseas markets and nuclear power plant construction.
That is a surprising announcement since Hyundai Development has built the biggest number of apartments in the country, with 340,000 units. It is a leading housing developer, with residential construction making up 60 percent of total revenue.
But the company made it clear that it would change its business structure by 2016 and give equal weight to construction and nonbuilding activities. It was advance notice of drastic transformation.
Lotte is the biggest real estate group in the country, owning 13 trillion won ($11.1 billion) worth of land based on official land price criteria. It has displayed an unmatched insight into the property business. Lotte has been highly successful by purchasing promising real estate and holding it for a long term.
The group did not sell land holdings even during the financial crisis. But Lotte changed direction in 2008 by putting Lotte Mart stores on the market. It is leasing back the sites after selling them. After Shin Dong-bin became vice chairman, the group’s real estate strategy is being overhauled.
Samsung Group has hardly been involved in real estate since the financial crisis. Its real estate transactions have been limited to the reshuffling of its portfolio, securing sites to build semiconductor or LCD manufacturing plants, or trading buildings among subsidiaries.
A few days ago, Samsung C&T Corporation gave up the management right to develop the Yongsan Station area commercial property project. It seems to be a preemptive measure to reduce risk exposure when it is hard to estimate prospects for the project. The move is an indication of how uncertain Samsung is of the future property market.
On Aug. 29, the government announced a real estate plan. It is offering an incentive package that includes the temporary suspension of the debt-to-income (DTI) ratio on mortgage lending. With this year’s elections out of the way, the administration finally laid down its cards. The plan exceeded market expectations, lifting all the regulations that can be suspended or relaxed.
The only remaining restrictions are the designated speculative zones in the three main districts of the expensive Gangnam area, and the price ceiling for apartment sale reservations. This leaves only the items that might contradict the administration’s “working-class friendly” campaign if they were lifted.
Opposition parties and civic groups harshly denounced the government’s plan, saying that it could lead to real estate bubbles and increasing household debt, which in turn could cause another financial crisis. However, I cannot help feeling that their arguments are exaggerated and lack logical consistency.
Let’s look at the reasoning that the Bank of Korea presented when it announced the interest rate increase. Its official position was that 70 percent of those taking out mortgage loans have above-average credit ratings, with the ability to service the loans, while the arrears rate is very stable at 0.5 percent.
The real estate market would not crash just because the interest rate has been increased somewhat. If you trust the Bank of Korea’s reasoning, it is a logical contradiction to link the suspension of the DTI to an immediate financial crisis.
The market was prudent in its response to the Aug. 29 real estate plan. Market analysts described it as a band-aid solution that is unlikely to change the property trend.
Builders are already reeling from the slump in apartment presale orders and decreasing profit margins. Even when the DTI rules were suspended, its impact was muted since there is little anticipation of a rise in housing prices. The psychology of the property market is what doesn’t go up, must come down.
The Bank of Korea seems to be eager to raise the interest rate one or two more times before the end of the year. The trade surplus began to fall last month, and it seems apparent that the Korean economy has been infected once again with the global economic slump.
At present, the long-term interest rate is near a historical low as China is buying Korean government bonds. The government has expressed its willingness to prevent a market collapse with the real estate measures. What will happen to the real estate market in the future? The truth lies somewhere between the nightmare of a property collapse and the government’s wishful thinking that such a possibility is overblown.
We will find out which side is right around next March. If the real estate market cannot remain stable and asks for relaxation of more property restrictions, it would be reasonable to conclude that the real estate boom has ended. Companies are showing signs of exiting early. It is a warning sign, like the canary in the coal mine. Samsung and Lotte are known for their highly sophisticated and perceptive decisions, and their moves might be signaling that the property boom has ended.
*The writer is an editorial writer of the JoongAng Ilbo.
By Lee Chul-ho