In the wake of IGN's Best RPG of 2004 and Best Story of 2004 awards going to KotOR II : TSL, it's clearly obvious that the KotOR franchise is all about delivering a compelling, engrossing strory w/ fun, addictive gameplay to boot.
Therefore, whoever is develping K3 shouldn't waste valuable development time creating a new engine, when other aspects (story, gameplay etc.), should receive a higher priority.
But, one thing is for certain; the Odyssey Engine (the current engine for K1 & k2), is already looking rather dated by today's uber quality standards. Hence, the best thing for the K3 team would be to licence an existing engine.