`Canned` commercial real estate

The volume of “canned commercial real estate,” which is not enough to pay off debts even after being auctioned off, is on the rise. As of late May, a fourth of loans extended against commercial real estate at six Korean banks could not be repaid even if the properties were put up for auction. The problem is closely related to the downturn of Korea`s real economy, sluggish consumption, and increased number of small business owners.

Retirees including baby boomers (born between 1955 and 1963) borrowed money from banks to invest in commercial real estate to earn monthly rental income. Certain borrowers used their loans to set up retail stores and start businesses. When regulations on mortgage loans grew tight last year, banks aggressively extended loans using commercial real estate such as retail stores, offices and factories as collateral. The upward trend in such loans is supported by numbers: they jumped year-on-year by 8 percent in 2010 and 11.9 percent in 2011, respectively.

Most loans using commercial real estate as collateral are extended to those with low credit or small business owners with few assets. In the wake of the economic slump, small business owners have had trouble repaying even the loan interest. The commercial loan delinquency rate of the six banks was 1.44 percent as of late May, far higher than that of residential mortgage loan delinquency (0.93 percent). Given the amount of loans from non-commercial banks such as savings banks, the loan loss problem could be more serious than it appears. Financial Supervisory Service Gov. Kwon Hyouk-se said Tuesday, “The delinquency rate is rising gradually. If economic conditions get worse, a crisis might come sooner.” The financial authorities should closely monitor potential loan losses such as the rising delinquency rate in commercial loans sensitive to the real economy, and find a solution for a soft landing.

Strategy and Finance Minister Bahk Jae-wan told a radio show Tuesday that economic growth for this year could plummet to the 2-percent range. The government must take a pre-emptive measure to block the negative cycle of weak consumption, real estate downturn, increased loan delinquency, and higher loan losses of financial institutions. It should encourage microcredit and expand the social safety net to protect small business owners. Korea has the fourth-largest share of small business owners among member countries of the Organization for Economic Cooperation and Development. It should also further develop a system that helps small business owners who are in a dead end situation change their businesses.