The fallout from the pandemic-era boom in logistics center project financing (PF) is spreading across South Korea's financial sector. Once regarded as stable investment vehicles that banks eagerly arranged loans for, some projects are now souring as oversupply collides with slowing leasing demand.
According to financial industry sources on the 13th, logistics center-related loans at Tongyang Life Insurance are turning sour.
The insurer's logistics center exposure totals 183 billion won, including 79 billion won for the Goyang Samsong logistics center, 70 billion won for the K1 No. 17 REIT Anseong Juksan logistics center, and 34 billion won for the Coupang logistics center in Oryu-dong, Incheon.
Distress is also emerging at logistics center projects where banks participated as lenders. The lender group for the Oryu-dong Coupang logistics center includes the Korea Development Bank and KB Kookmin Bank. The lenders recently notified the borrower of an event of default (EOD) and are pursuing a sale of the asset, sources said.
The Icheon Jaseok-ri logistics center and the Ansan Gray Box logistics center — for which Kookmin Bank and Shinhan Bank serve as lenders — are also struggling with weak returns.
The logistics center troubles are weighing on banks' soundness indicators. IBK Industrial Bank of Korea's delinquency rate on small and medium-sized enterprise real estate loans stood at 1.28% in the first quarter of this year, more than double the 0.54% a year earlier and up from 0.87% in the prior quarter. The rise was driven in part by large-scale logistics center PF defaults.
Commercial banks ramped up participation in logistics center PF as logistics demand surged after COVID-19. A credit executive at one commercial bank said, "During the pandemic, banks viewed logistics centers as stable investments with low vacancy rates, and it was common for banks to arrange PFs or join lender groups. Most commercial banks likely have some exposure, though the scale varies." He added, "Since last year, as oversupply-driven distress became a concern, we cut back on new loans, and with supply shrinking as a result, the market is gradually working through the issues."
The vacancy problem is especially severe at cold storage logistics centers, which command higher rents than ambient-temperature facilities. According to commercial real estate services firm RSQUARE, vacancy rates at greater Seoul area logistics centers stood at 13.3% for ambient facilities and 37.3% for cold storage at the end of last year — meaning more than one in three cold storage centers sits empty. Banks are tightening loan screening for logistics centers and moving quickly to manage troubled projects. Another commercial bank credit executive said, "We are managing already-distressed project loans by either selling them to NPL specialists or writing them off as losses."
