Legoland Korea debt payment adds to property woes

A missed debt payment by the developer of Legoland Korea theme park adds to the difficulties faced by the nation's real estate market that is already weakened by surging interest rates.

In May, the amusement opened because of the turmoil in global debt markets, which made it much pricier for Korean borrowers including developers to refinance debt. A commercial paper repackaging 205 billion won $144 million of loans for the Legoland Korea project wasn't paid on the maturity date of Sept. 29, according to backers of the project.

According to Korea Investors Service and Gangwon province, the northeastern municipality where the park is located and the largest shareholder in project developer LL Development, that is a default.

While South Korea's property woes may be dwarfed by those of China, Legoland Korea missed debt payment is a reminder for global investors that interest-rate hikes are battering once-booming real estate markets around the world. A downturn in Korea's property market could cause a 10% decline in national house prices from their peak to trough, and that could prompt the central bank to switch to rate cuts, according to Nomura analysts.

There are already increased concerns over real estate project financing and lower-rated builders in Korea, and this event will likely cause investor sentiment toward those sectors to be further dangered, said Kim Eun-gie, credit analyst in Seoul at Samsung Securities Co. It is like slapping someone who is about to cry. According to Gangwon province, LL Development, the borrower of the loan and developer of the amusement park, will file for receivership. After LL Development's rehabilitation is arranged, the province still has an obligation to repay the loan and will meet it, a spokesman said. The province will find a new developer with sufficient assets and the ability to normalize the project through the rehabilitation procedures, according to the spokesperson.

In a report on October 4, Nomura analysts including Jeong Woo Park wrote that Increasing financial costs have squeezed returns on housing investment in Korea, setting the stage for a downturn in the housing market.

In addition to expecting a 10% drop in Korea's house prices, they see a 18% drop in Seoul apartment prices over the next few years. That would be a slower downturn than the 2009 -- 2014 housing market slump.

In August, the transaction volume in Seoul s retail property plunged 21%, while office deals fell 21%, the sharpest monthly drop since 2015 for both, according to Real Capital Analytics data.

Spreads on Korean corporate notes have surged to the highest since 2010 in line with the global debt market rout sparked by rising interest rates and accelerating inflation. Shin Jae-hoon, head of fixed-income team at Mirae Asset Global Investments Co, said the news of Legoland is another factor weighing on the local credit market.

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