The Yongsan collapse

The Yongsan International Business District, the country’s largest ever urban development project, is teetering on the brink of bankruptcy. The 31 trilllion won ($28.7 billion) project to create an international business district in the heart of Seoul may go down the drain due to conflicts of interests among a state-run stakeholder, private investors and local government amid very flat real estate market prospects.

State railroad operator Korail, the largest stakeholder in the project, recently turned down a demand from the project contractor to provide collateral for bond issuances and loans to raise additional capital. Dream Hub Financial Investment, a special purpose company set up for the construction, said it would have to seek bankruptcy protection if it cannot pay 5.9 billion won in interest on loans by March 12. The catastrophe is being caused by disagreement among shareholders over the development process. Korail wants incremental development over the space of 560,000 square meters (138.4 acres) in Yongsan that includes a 150-story high-rise, while minority shareholder Lotte Tour Development wants an integrated development.

The trajectory in the development of the project suggests the operators and project shareholders have been overzealous. The idea came from Prime Minister’s Office’s task force that suggested in 2006 that the debt of Korail be eased through urban development. The project turned bigger after then-Seoul Mayor Oh Se-hoon included redevelopment of the western Ichon-dong residential neighborhood as part of his ambitious Hangang riverfront redevelopment plan.

Most of the participants were betting on a lasting buoyancy in the construction business and real estate market. But the market turned down after the global financial crisis in 2008. Construction was delayed, taking toll on hopes of more than 10,000 residents in western Ichon-dong. Properties are held hostage to the development project since removal guidelines were announced in August 2007. About 54 percent of 2,290 households owe debts averaging 340 million won because they have been waiting for their own compensation.

In order to prevent a total burst of the bubble, the project operator, stakeholders, and Seoul City administrators should sit down and work out a restructuring plan to save the project. The government should also intervene in a mediating role. It, however, should refrain from direct involvement or state funding. It must not set a poor precedent of bailing out a private-sector construction project with taxpayers’ money.