It was found that about 9 out of 10 construction companies in the top 100 in the construction capability evaluation failed to prepare business plans for next year. It was unable to win new orders and was in a position to worry about survival due to the accumulation of deficits. There are observations that the construction industry, which is in a ‘threefold trouble’, such as soaring construction prices, project financing (PF) funding difficulties, and a sharp increase in unsold sales, is being pushed into a harsh game of survival.
On the 11th, the Korea Economic Daily surveyed construction companies in the top 100 in construction capability evaluation on whether to establish business plans for next year, and only about 10 construction companies, including Umi Construction and Bando Construction, made plans. None of the large construction companies in the top 10 have finalized their business plans.
Even though the end of the year is approaching, construction companies have not even prepared a project draft, such as an apartment sale plan. Right now, they are concentrating on securing funds and resolving unsold sales. Some construction companies are considering emergency management cards following the recent voluntary retirement. An executive in charge of strategy at a large company said, “Uncertainties such as interest rate variables are so great that it is difficult to set new orders and sales plans next year.”
The situation is also serious for small and medium-sized companies and implementation industries with many workplaces in the provinces. Dongwon Construction Industries (ranked 18th in construction capability evaluation in South Gyeongsang Province), which has sales of 50 billion won, followed Woosuk Construction, which was ranked 6th in the general construction company in Chungcheongnam-do last September, went bankrupt or shocked. Anxiety is spreading in the industry, such as a mid-sized construction company that has been trying to win unreasonable orders since last year, overdue its employees’ salaries for more than five months. As the real estate recession is prolonged, there is a sense of crisis that a series of bankruptcies after the first half of next year, centering on small and medium-sized companies and partner companies with poor profit structures, is prevailing.
Park Young-gwang, chairman of Dongwoo Development, who has been in the construction industry for 30 years, expressed concern that “the next year, when we cannot foresee the future, will be the year of the biggest crisis in the construction industry despite experiencing both the foreign exchange crisis and the global financial crisis.”
Bankruptcy of Woosuk and Dongwon Construction, mid-sized local companies… 20% increase in construction cost due to high labor and material costs
Unsold sales pile up and PF loan refinancing is blocked… Large companies also retire due to liquidity crisis
Construction A in the metropolitan area holds an emergency situation inspection meeting every morning. This is because rumors are circulating that the developer is on the verge of bankruptcy as the sales rate of the 300-room officetel in Seoul under construction is below 30%. If bankruptcy occurs, unsold units must be taken over and construction must be carried out with own funds. Already, some partners are procrastinating on construction due to concerns about funding delays. The project financing (PF) loan refinancing situation is also blocked, so it is difficult to establish a management plan for next year.
Anxiety about ‘bankruptcy’ is creeping in the construction industry due to the real estate market slump. This is because construction companies standing at a crossroads for survival are rapidly increasing as labor costs have soared, unsold homes have piled up, and financial companies have tightened their money. The industry is concerned that “the housing supply system itself is in crisis,” and that “if the government does not normalize the market by releasing regulations, the housing industry may wither away.”
Business plan ‘drift’… Mid-sized company bankruptcy crisis
None of the large construction companies in the top 10 in the construction capability evaluation 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. It is known that some large companies are also considering restructuring such as voluntary retirement at the end of the year.
Small and medium-sized companies with less brand awareness than large companies are also being pushed into marginal situations. This is because business sites are concentrated in provinces where the actual transaction price of apartments has plummeted by more than 20%. In addition, it has been a long time since consumers stopped visiting the so-called ‘revenue-type real estate’ such as shopping malls, officetels, and knowledge industry centers that were previously supplied. Some construction companies that could not withstand the deteriorating performance are in bankruptcy.
Following the bankruptcy of Woosuk Construction, a general construction company in the Chungcheongnam-do region in September, Dongwon Construction Industries, which ranks 18th in the construction capacity evaluation in the Gyeongnam region, also went bankrupt recently. Dongwon Construction Industries was driven into financial difficulties as the developer went bankrupt as a large number of neighborhood living facilities built in Daegu went unsold. It mobilized up to 36% annual debentures, but failed to pay bills worth 2.2 billion won.
As unsold units overlap with occupancy difficulties, a sense of crisis is spreading that small and medium-sized companies may go bankrupt in the first half of next year. An official from a mid-sized construction company sighed, saying, “At a time when even large construction companies are reeling from a liquidity crisis, medium-sized companies that focus on simple contracts can no longer survive.” rested
Uncertainty persists amid interest rate risk
The construction industry is complicated by internal and external variables such as steep interest rate hikes, soaring construction costs, and disruptions in logistics procurement. In addition, they are suffering from a headache due to the rapidly increasing number of unsold units. Recently, about 700 cases of apartment subscriptions for 1,000 units supplied by B Construction in Cheonan, Chungcheongnam-do fell short. At the beginning of this month, not a single case of apartments (232 units) supplied by C Construction to Hampyeong-gun, South Jeolla Province was received in the special supply and first-priority subscriptions. In the aftermath of the steep interest rate hike, the number of unsold homes nationwide in October was 47,217, which is about to exceed 50,000.
It is also a burden that construction costs continue to be in the red due to soaring 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 starts through October plunged 26% from the same period last year to 330,000 households. The top 10 construction companies estimate that this year alone, construction costs have increased by nearly 500 billion won more than expected. In the industry, losses are expected to continue until 2024, when construction orders received since the second half of last year are completed.
It is highly likely that financial authorities will lock down real estate loans such as PF, and the financial crisis will continue next year. There is considerable concern that the new development market will increase the number of default (debt defaults) due to the suspension of bridge loans and PF loans.
The industry is in the position that the government’s preemptive measures are urgent. A representative of a large construction company said, “In order for the construction industry to make a soft landing, deals must be made and additional measures must be taken for end users to purchase their own homes.”
Reporters Kim Eun-jeong/Lee Hyeon-il/Park Jong-pil [email protected]