A promising development project may be scrapped because of a peculiar battle for control between a Korean conglomerate and a Korean government-controlled enterprise. The feud is a lesson for investors who believe that investing in a project with the involvement of the Korean government will assist in guaranteeing success. Often the involvement of Korean government enterprises overly complicates matters and leads to power struggles between the “experts” and the government.
Because of Korean government realities, however, often the involvement of a Korean government enterprise is required.
This project is an exciting project for many of our domestic clients struggling in this market and hopefully personality conflicts will not put in jeopardy a great project that will revitalize an area that is the geographic center of Seoul and could become a new downtown in a district that will loose a great deal when the U.S. military base is relocated.
The following is a clip of an article that appeared in the Korea Times today. The complete article may be found at: Yongsan Development Plan in Jeopardy.
The project includes the construction of the world’s second-tallest building and 22 other skyscrapers, a fancy shopping complex and two six-star luxury hotels.
With the construction work scheduled to start next year, however, the Yongsan scheme has continued struggling through an internal feud among major stakeholders and construction firms and fierce resistance from tenants.
Coupled with a prolonged market slowdown here, another dispute broke out last week between its two largest shareholders ― Korail and Lotte Tour.
The state-run rail operator Korail and Lotte Tour hold 25 percent and 15.1 percent stakes, respectively, of Dream Hub, a special purpose company responsible for the project.
Currently, the whole process of design, construction and sales is carried out by Yongsan Developers’ Consortium, an asset management company, of which Lotte owns 70.1 percent stakes, while Korail holds the remaining 29.9 percent.
On Sept. 17, Korail convened a board directors’ meeting to take over a 45.1 percent stake held by Lotte, claiming that the company has attracted no investment since it has managed the stakes that were previous owned by Samsung Construction and Trading.
In 2010, Samsung broke away from the project, entrusting its stakes to Lotte until another major builder joins.
“The AMC, led by Lotte Tour, will fail to attract enough funding, leading to the project’s failure. In order to reduce future risk, it would be better for Korail to take its direct control,” said a Korail official.
Lotte and other construction firms resisted, however, saying that if AMC is controlled by the state-run Korail, its operation could face various government regulations under the nation’s fair trade law.
“Under the agreement, Korail is not allowed to hold more than 29.9 percent stakes. But the company is pushing ahead with its plan unilaterally,” said a Lotte official.
As the two parties and other board members failed to reach an agreement, the AMC agenda was postponed to be discussed during their next meeting, together with a new funding plan worth 250 billion won ― another conflicting issue.
Korail and Lotte had also clashed when the rail operator’s proposal to increase Dream Hub’s capital from the current 1.4 trillion won to 3 trillion won was denied due to opposition from Lotte.
With the local property market showing no sign of recovery, industry watchers urged a prompt resolution, saying their conflict would not be helpful to attracting more investment and selling offices.
There may be more to this story. I will update the reader of this blog when more news is available.
Sean Hayes, IPG’s Co-Chair of the Korea Practice Team, may be contacted at: SeanHayes@ipglegal.com
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