The construction industry faced its worst crisis at the end of the year due to the real estate recession and liquidity depletion. This is because the ‘four major problems’ are weighing down construction companies, including continued unsold housing in local areas, a surge in construction costs, a crunch in project financing (PF) loans, and a sluggish occupancy rate. Voices of concern are spreading that the warning light for Domino’s bankruptcy has turned on.
According to the Ministry of Land, Infrastructure and Transport’s Construction Industry Knowledge Information System on the 26th, 41 general construction companies, including Samseung Construction in Daejeon, reported closure of business this month. This year, the total number of business closure reports (including changes, corrections, and withdrawals) was 496, a 67.0% increase from the same period last year (297 cases). This is the highest in 17 years since 2006 (530 cases).
Many people point out that unsold local properties are squeezing construction companies. The number of workplaces (as of last July) managed by the Housing and Urban Guarantee Corporation (HUG) as ‘subject to risk of sales accidents’ was counted at 91 locations nationwide and 53,641 households. The number of complexes subject to management increased six times compared to 2020 (8,864 households).
There is still no clear solution to the problem of increased construction costs. The number of trust project sites where recovery of construction costs is expected to be difficult (as of September by the Construction Industry Research Institute) was 26 out of 70, or 37.1%.
The CEO of a construction company in Changwon, Gyeongsangnam-do complained, “With unsold units still remaining and PF loan suspensions, coupled with rapidly rising construction costs and low occupancy rates, all small and medium-sized construction companies in the region are on the verge of closing down.”
Even if construction is halted, a new construction company cannot be found.
Reluctant to participate in construction due to lack of PF loan… After completion, malicious unsold units are also on the rise.
Recently, a pre-sale guarantee accident occurred at the ‘Sasang Station Alert Centrian 3’ business site operated by Shinseung Housing in Sasang-gu, Busan. This is a project to build 222 residential-commercial housing units near Sasang Station. The scheduled completion date was last June. The completion rate has been stuck at 86.13% for six months due to unsold units and a funding crunch. The Housing and Urban Guarantee Corporation (HUG), which guaranteed the sale, needs to complete the remaining project, but there is no date for when people will move in.
The construction industry is being pushed to the edge of a cliff due to high interest rates and the real estate recession that has continued since last year. The unsold inventory in local areas is not easily resolved, and construction costs are soaring that construction is coming to a halt one after another. Recently, the occupancy rate (proportion of households moving in within 2 to 3 months after construction completion) has dropped, increasing financial difficulties. The real estate project financing (PF) loan market, which provides initial funding for development projects, is also virtually closed. This is why the number of construction companies going out of business is the highest in 17 years.
Rapid increase in closures and bankruptcies of construction companies
In the industry, small and medium-sized construction companies are continuing to file for court receivership due to the economic downturn that has continued since last year. Dongwon Construction Industry, which ranked 18th in the Gyeongnam region, Daewoo Industrial Development, which ranked 75th in construction ability evaluation, and Daechang Corporation, which ranked 109th, went bankrupt. Recently, Geumgang Construction (578th), Shinil (113th), Kookwon Construction (467th), and Nam Nam Construction (2318th) entered court receivership. The number of reports of business closures for general construction companies this year is 496, the highest since 530 cases in 2006 before the global financial crisis.
In Paju, Gyeonggi Province, a townhouse project site was stranded ahead of completion (completion rate 96.63%) due to the bankruptcy of the construction company. Construction was halted starting in September of last year due to a worsening funding crunch, and the construction company chose court receivership in April. Construction costs have soared and losses are inevitable even with high-interest funds, so it is highly likely that the disruption will be prolonged.
Confusion continues at the site where a new construction company is being sought due to the bankruptcy of the construction company. At an apartment complex in Ulsan (30% completion rate), business has been at a standstill for several months following the bankruptcy of the construction company. This is because construction companies are refusing to participate due to difficulties in obtaining PF loans. A union official explained, “The construction company that expressed its intention to construct the project also withdrew due to the difficulty of obtaining a loan. The union members are raising additional contributions and looking for a construction company again, but there is no clear solution.”
There are a lot of negative news such as unsold units, unoccupied units, PF infarction, etc.
Among real estate developers and construction companies, the response is that there is no way out due to unsold units and unoccupied units, rising construction costs, and PF crunch. In particular, unsold units in local areas and low occupancy rates are evaluated as the biggest obstacles to the industry’s capital circulation. According to the Housing Industry Research Institute, the occupancy rate of local apartment complexes last month was only 68.8%. This means that in sites with a low occupancy rate, recovery of the balance, which is the construction company’s profit, is delayed.
Unsold inventory is also a burden. As of last September, the number of unsold units nationwide reached 59,806 households. The number of unsold units after completion, called ‘malicious unsold units’, was 9,513 households, an increase of 1.3% (121 households) from August (9,392 households). An official from a mid-sized construction company explained, “Malicious unsold units literally result in a financial burden on the company,” adding, “It creates a vicious cycle of funds and hinders the promotion of new businesses.”
The still tight PF market is also increasing concerns in the industry. Due to the rapid rise in loan interest rates, the interest rate on bridge loans received by some businesses for land purchases is as high as 20%. Because the conversion to this PF is blocked, it is called a ‘zombie project’ that has virtually no business potential. Regarding the government’s PF support measures, the industry unanimously says, “The financial companies that actually provide loans are raising various standards, so the measures are not being felt.”
There are a series of cases where successful bidders are giving up land to provide housing. Developer A won the bid for a residential-commercial complex near the station in Wonju, Gangwon-do last year, but failed to pay the down payment due to difficulties in procuring PF. In the end, the down payment amounting to 30 billion won was forfeited. Developer B also failed to develop the semi-residential site it had won a bid for in Suwon, Gyeonggi Province in 2020 and chose to terminate the contract. I lost 25 billion won in down payment. A representative of a local housing company said, “There are numerous sites where construction is disrupted due to a lack of funds in the real estate market,” and added, “There is a high possibility that small and medium-sized construction companies facing limitations will go bankrupt at the end of the year.”
Reporter Yoo Oh-sang/Seo Ki-yeol osyoo@hankyung.com
2023-11-26 09:35:11
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