It was found that about 9 out of 10 construction companies in the top 100 in the construction capacity assessment failed to prepare business plans for next year. It was unable to acquire new orders and was unable to worry about survival due to the accumulation of deficits. There are observations that the construction industry, which is in a “triple trouble” such as rising construction prices, project financing (PF) funding difficulties and a sharp increase in unsold sales, is being pushed into a tough survival game.
On the 11th, the Korea Economic Daily surveyed the top 100 construction companies in the construction capacity assessment on whether to establish business plans for next year, and only about 10 construction companies, including Umi Construction and Bando Construction, they made plans. None of the major construction companies in the top 10 have finalized their business plans.
Although the end of the year is approaching, the construction companies have not even prepared a draft project, such as an apartment sales plan. Right now, they are focusing on protecting funds and resolving unsold sales. Some construction companies are considering the possibility of cards for emergency management following the recent voluntary retirement. A strategy executive at a large company said, “Uncertainties such as interest rate variables are so large that it is difficult to establish new orders and sales plans next year.”
The situation is also serious for small and medium enterprises and implementation industries with many jobs in the provinces. Dongwon Construction Industries (ranked 18th in construction capacity assessment in South Gyeongsang Province), which has a turnover of 50 billion won, followed Woosuk Construction, which ranked 6th in overall construction company in Chungcheongnam-do last September, it went bankrupt or suffered a shock. Anxiety is spreading in the industry, for example a medium-sized construction company that has been trying to get unreasonable orders since last year, its employees’ salaries are more than five months late. As the housing recession drags on, there is a sense of crisis that is prevailing a series of bankruptcies after the first half of next year, centered on small and medium-sized businesses and partner companies with weak income structures.
Park Young-gwang, president of Dongwoo Development, which has been in the construction industry for 30 years, expressed concern that “next year, when we cannot predict the future, will be the year of the biggest crisis in the construction industry despite experienced both the currency crisis and the global financial crisis”.
Local medium-sized enterprises Woosuk and Dongwon Construction go bankrupt… 20% increase in construction costs due to high labor and material costs
Unsold sales pile up and PF loan refinancing is stalled… Even big companies retire due to cash crunch
Building A in the metropolitan area holds an emergency situation inspection meeting every morning. This is because there are rumors that the developer is on the verge of bankruptcy as the sales rate of the 300-room officetel in Seoul under construction is less than 30%. In the event of bankruptcy, the unsold units must be taken over and construction must be carried out with its own funds. Some partners are already delaying construction due to concerns about funding delays. The refinancing situation of project financing (PF) loans has also been blocked, making it difficult to establish a management plan for next year.
“Bankruptcy” anxiety is creeping into the construction industry as the housing market has collapsed. That’s because construction companies that are at a crossroads to survival are rapidly increasing as labor costs have soared, unsold homes have piled up, and finance companies have squeezed their cash. The industry is concerned that “the housing supply system itself is in crisis” and that “unless the government normalizes the market by issuing regulations, the housing industry could wither.”
The business plan ‘derives’… Bankruptcy crisis of medium-sized enterprises
None of the major construction companies in the top 10 in the construction capacity assessment have finalized their business plans for next year. Most of them are under review, so there is a high possibility that an unprecedented situation will occur in the new year without a management goal. Due to the high uncertainty surrounding the market, some large companies are threatening to reduce new orders next year by up to 40% compared to this year. Even some large companies are known to be considering restructurings such as voluntary retirement at the end of the year.
Small and medium-sized enterprises with lower brand awareness than large companies are also pushed into marginal situations. This is because commercial sites are concentrated in the provinces where the effective transaction price of apartments has dropped by more than 20%. Furthermore, it has been a long time since consumers stopped visiting so-called “revenue-type real estate” such as shopping malls, offices and knowledge industry centers that were previously stocked. Some construction companies that could not stand the deterioration in performance are bankrupt.
Following the bankruptcy of Woosuk Construction, a general construction company in Chungcheongnam-do region in September, Dongwon Construction Industries, which ranks 18th in the assessment of construction capacity in Gyeongnam region, also recently went bankrupt. Dongwon Construction Industries found itself in financial trouble as the developer went bankrupt as a large number of neighborhood housing structures built in Daegu remained unsold. It mobilized up to 36% of annual bonds, but failed to pay bills worth 2.2 billion won.
As unsold units are superimposed on employment difficulties, a sense of crisis is spreading that predicts that small and medium-sized enterprises may go bankrupt in the first half of next year. An official at a mid-sized construction company sighed, saying, “At a time when even large construction companies are recovering from a cash crunch, mid-sized companies that focus on simple contracts can no longer to survive”.
Uncertainty persists amid interest rate risk
The construction industry is complicated by internal and external variables such as sharp increases in interest rates, rising construction costs and disruptions in logistics procurement. In addition, they suffer from headaches due to the rapidly increasing number of unsold units. Recently, about 700 subscription cases of 1,000-unit apartments provided by B Construction in Cheonan, Chungcheongnam-do fell short. Earlier this month, not a single case of apartments (232 units) supplied by C Construction in Hampyeong-gun, South Jeolla province was received in the special provision and first priority subscriptions. In the aftermath of the sharp rise in interest rates, the number of unsold homes nationwide in October was 47,217, which is close to surpassing 50,000.
It is also a burden that construction costs continue to be in the red due to rising construction costs. According to the Korea Institute of Civil Engineering and Building Technology, the cost of raw materials, labor and equipment (construction cost index) for construction has increased by about 20% compared to two years ago. It is for this reason that the number of housing started through October has plunged by 26% compared to the same period last year to 330,000 households. The top 10 construction companies estimate that construction costs have risen nearly 500 billion won more than expected this year alone. In the sector, losses are expected to continue until 2024, when the construction orders received since the second half of last year will be completed.
It is highly probable that the financial authorities will freeze real estate loans like PF and the financial crisis will continue next year. There is considerable concern that the new development market will increase the number of delinquencies (debt defaults) due to the suspension of bridging loans and PF loans.
The industry is in the position that government preventive measures are urgently needed. A representative of a large construction company said: “In order for the construction sector to make a soft landing, agreements must be concluded and additional measures taken for end users to buy their own homes.”
Reporters Kim Eun-jeong/Lee Hyeon-il/Park Jong-pil [email protected]
