2024-03-28 18:00:00
Government announces construction industry recovery support plan, purchases unsold local properties and converts to rental business… A 15% increase in public housing construction costs led to a series of bankruptcies among construction companies. In response to the ‘April crisis’ theory, policies from the 2008 financial crisis were brought out.
Korea Land and Housing Corporation (LH) is investing 3 trillion won to purchase land for project financing (PF) business sites of construction companies facing a liquidity crisis. After completion of construction in local areas, unsold houses will be purchased by Corporate Restructuring REITs (CR REITs) and converted into a rental business. This year’s public housing project construction costs will be raised by 15% compared to the previous year, making it realistic to reflect inflation in construction costs.
On the 28th, the Ministry of Land, Infrastructure and Transport announced the ‘Construction Economy Recovery Support Plan’ with these contents as its core. As national projects were canceled one after another due to a surge in construction costs, and the ‘April Crisis’ rumor that raised concerns about a series of construction companies going bankrupt continued, the policy used during the 2008 financial crisis was brought back. However, there is also criticism that unilateral ‘donation’ is like giving preferential treatment to construction companies with public taxes. Some point out that delaying restructuring of insolvent construction companies is actually lowering the competitiveness of the construction industry.
● ‘Two tracks’ of liquidity support and construction cost increase
The core of this support plan is securing liquidity for construction companies and realizing construction costs.
First, LH will provide support by purchasing land owned by construction companies. Starting on the 5th of next month, companies looking to sell land will receive a ‘desired sale price’ and then purchase land in descending order of price. The upper purchase price is 90% of the publicly announced land price. The purchase target is land of 3,300 m2 or more that was acquired before January 3 of this year by a company that needs to secure liquidity because its debt is greater than the land price. LH pays the entire amount directly to the financial institution as a debt repayment bond.
At the same time, CR REITs is coming back to market after 10 years to resolve the growing number of unsold units after completion, mainly in regional areas. CR REITs is a fund that acquires bad unsold houses, converts them into a rental business, and sells them according to the real estate market. In 2009, right after the financial crisis, CR REITs were introduced and purchased 2,200 unsold homes, and 500 homes were purchased in 2014. In order to increase the effectiveness of CR REITs management, the government excludes the heavy acquisition tax levied when purchasing a home and excludes the addition of comprehensive real estate tax for 5 years after acquisition. Eligible for tax benefits are homes purchased by CR REITs from this day to the end of next year.
Measures will also be prepared to prevent public construction failures by making construction costs more realistic. Last year, large-scale public projects, such as the underground complex development of Yeongdong-daero in Gangnam-gu, Seoul and the Seoul deep rainwater drainage tunnel, were rejected one after another. A total of 16 technology-type national projects were rejected from January last year to March this year, worth 4.2 trillion won.
First, the standards for construction cost surcharges are subdivided according to location, building, and number of floors, which has the effect of increasing construction costs, and the occupational safety and health management fee is increased by 15-20%. The construction cost of public housing with private participation will increase by 15% compared to last year. For technical bidding, which is a high-level construction project, the limit on design compensation costs for those who fail (1.4% of the current construction cost) is raised to the level of the actual design cost.
● Criticism of “supporting insolvent construction companies with taxes”
Some say that it is inappropriate for construction companies to make up for the insolvency caused by recklessly entering the business during the real estate boom through finances. The logic is that the investment risks resulting from the management decisions of private companies should not be passed on to the public. This is the background to some voices calling for the exit of insolvent construction companies along with liquidity support. An official in the construction industry said, “In order to improve the market situation, which had no choice but to receive orders at a loss, it is ultimately necessary to identify construction companies.”
There are also criticisms that it encourages moral hazard among construction companies or that the measures are less effective.
The measures on this day also included a plan to abolish the ‘5% discount on sales price’, which is a condition for supporting PF guarantees for businesses with unsold units. Construction companies are receiving financial support without bearing even the slightest responsibility. Kim Hyo-seon, a senior member of NH Nonghyup Bank, said, “Once the economy normalizes, we need to consider ways to receive public contributions again from construction companies that received support.”
Regarding the realization of construction costs, an official from a mid-sized construction company said, “For most public construction projects, small and medium-sized construction companies bid for the lowest price, but how to reflect the price increase in construction costs was omitted from the plan.”
Reporter Kim Hyeong-min [email protected]
Reporter Lee Seok-bok [email protected]
1711659007
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