As the real estate market stagnates, local construction companies are increasingly facing management difficulties.
This is a result of companies competitively acquiring land, expecting to sell out properties, but later abandoning projects due to deteriorating market conditions or assuming debts instead of the contractors at construction sites where they had entered into completion guarantees.
According to the Korea Construction Industry Research Institute on the 12th, total closure reports for general construction companies last year reached 641. This marks a 10.3% (60 cases) increase compared to last year, the highest since related surveys began in 2005 (629 cases).
As of Jan. 31 this year, the total number of closure reports (including changes, corrections, and withdrawals) was 332. By company type, 58 were general construction companies and 274 were specialized construction companies. By region, companies located in local areas accounted for 203, or 61% of the total. Companies in Seoul, Gyeonggi, and Incheon accounted for 129, or 39%.
The construction industry analyzes that local construction companies are struggling with cash flow difficulties due to the stagnation of the local sales market, rising construction costs, and increasing financial costs.
Construction group A, a domestic company, returned land acquired from the Korea Land and Housing Corporation (LH) in Gangwon and Gyeonggi between 2021 and 2022 back in May last year. In this process, A gave up land contract deposits amounting to hundreds of millions of won.
In the past 2 to 3 years, soaring construction material prices and high interest rates have led project financing (PF) loan rates to spike, leading companies to determine that abandoning projects, even at the cost of losing deposits, is less damaging than continuing with them.
A logistics center construction site in Gyeonggi, where construction company B had entered into a completion guarantee, has been transferred to public auction due to a loss of benefits after failing to repay the loan interest while struggling to find tenants. Although B completed the construction, it suffered losses as it could not recover some construction costs.
According to the real estate development industry, B has reportedly reduced its staff to one-tenth of the previous year in an effort to overcome its management difficulties, but is said to be facing bankruptcy due to deteriorating cash flow.
An executive from development company C noted, "As the real estate market worsens and unsold properties increase, many construction companies are facing severe management difficulties due to difficulties in recovering construction costs. We have managed to cut expenses, but ultimately, companies will continue to file for court protection—or, if that proves difficult, go bankrupt."
The representative of development company D stated, "Even first-tier construction companies in the country are suffering from rising construction costs, increased labor and financial expenses, and unsold properties, but the situation is even more serious for local construction companies. This year, the annual goals for most development and construction companies are simply to 'hang in there.'"
The actual difficulties faced by construction companies are leading to court protection filings or bankruptcy.
Shin Dong-a Construction, which recorded the 58th construction capability evaluation in 2023, applied for court protection in January this year. Daewoo Construction, the second largest construction company in Gyeongsangnam-do, which ranked 103rd in the 2023 evaluation, also filed for court protection in January.
In November last year, Busan construction company Shin Tae-yang applied for court protection, and in December of the same year, Jeil Construction, based in North Jeolla Province, was also processed for bankruptcy.