Indebted city takes large gamble on real estate

A city government that stopped paying its debts 16 months ago announced it would borrow hundreds of millions of dollars more for real estate development.

The Seongnam city government said Tuesday it had submitted a budget plan for the years 2011 to 2015 that included issuing 1.03 trillion won ($894 million) of government bonds until 2014 to develop real estate. From one of the projects, it hopes to sell apartments at a profit to dig itself out of its fiscal mess.

In July 2010, Seongnam Mayor Lee Jae-myung declared a moratorium on repayments on 520 billion won in city debt after he failed to come up with a way of paying for a luxurious new city hall complex and several other projects. The city hall and other projects were green-lighted by Lee’s predecessor, Lee Dae-yub.

The city government is investing in real estate projects in Goyang, Gyeonggi, which observers consider a safe bet. The risky development is in a new town project combining four towns in Seoul and Gyeonggi: Jangji-dong and Geoyeo-dong in Songpa District, southeastern Seoul, Changgok-dong in Seonggnam, Gyeonggi, and Hakam-dong in Hanam, Gyeonggi. The Seongnam government has been involved in the project since March and said it needs 340 billion won to develop an apartment complex in Changgok-dong.

The city government told the JoongAng Ilbo it will develop an apartment complex of 1,137 units by investing 559 billion won, including 340 billion won from the new government borrowings. If the project is completed and all of the apartments are sold, the government said it expects to earn 101.7 billion won. The city government expects to sell the apartments for 15 million won per 3.3 square meters (35.5 square feet) and will use its profit to pay off city debt.

But real estate analysts and some members of the city council worry that the project is a bad gamble. Park Wan-jeong, a city council member, said that the city’s expected sale price for the apartments seriously exceeds an estimate of the Ministry of Land, Transport and Maritime Affairs, which said the selling price for the apartments will be 12.8 million won per 3.3 square meters.

If the selling price is that low, the city will lose 4.7 billion won in the investment. “It is a very risky gamble running a project that has a low possibility of generating revenue,” Park told the JoongAng Ilbo. “I wish the city government realized that the real estate market is depressed.”

By Yoo Gil-yong [sakwon80@joongang.co.kr]