The redevelopment of Sangye-jugong 5 Complex in Nowon District, Seoul is facing an increased possibility of a private contract as major candidate construction companies are withdrawing ahead of the bid deadline. With low business feasibility and growing burden of fees, there are difficulties in selecting a construction company.

Sangyejupong 5 Complex redevelopment perspective. /Courtesy of Seoul City

According to the maintenance industry on the 25th, Korea Asset In Trust, the project implementer for the Sangye-jugong 5 Complex redevelopment, will close bidding for the selection of a construction company on the 28th. In the general competitive bidding method, a sole bid will be rejected, and if it is rejected twice in a row, it can switch to a private contract.

At the site briefing for the Sangye-jugong 5 Complex redevelopment held last month, 10 companies attended, including Hanwha, Hyundai Engineering, HDC Hyundai Development Company, Lotte Construction, Daewoo E&C, SK Eco Plant, Hyosung Heavy Industries, ChinHung International, Ssangyong Construction, and BS Hanyang.

Afterward, HDC Hyundai Development Company and Hyundai Engineering showed interest, predicting a three-way competition; however, Hyundai Engineering expressed its intention to virtually withdraw. Following this, HDC Hyundai Development Company and Hanwha also withdrew their promotional staff from the site, indicating a potential exit.

However, Hanwha and HDC Hyundai Development Company stated that they have not yet confirmed their withdrawal from the project. A Hanwha official said, "It is unfounded to claim we have withdrawn from the project," adding, "We are reviewing our participation in the project."

An official from HDC Hyundai Development Company also explained, "Currently, we are not conducting promotional activities, but we are still reviewing the project."

Forecasts indicate challenges in selecting a construction company due to low business performance and high expected fees. The construction cost for the Sangye-jugong 5 Complex redevelopment project is 377.2 billion won, amounting to 7.7 million won per 3.3 square meters. The total complex has 840 households, all of which are small-sized units of 37 square meters, leading to a substantial burden of fees. When the union selected GS Engineering and Construction as the construction company in 2023, the construction cost was 6.5 million won per 3.3 square meters, yet the expected fee was projected to be 500 to 600 million won based on an 84 square meter unit. Now, with the construction cost rising to 7.7 million won, forecasts suggest that the fee will be around 700 million won.

Considering that the share of fees for Sangye-jugong 8 Complex (Foreena Nowon), which has already completed reconstruction and is ready for occupancy, was at most 300 million won, the burden of fees is significantly larger.

Additionally, during reconstruction, it will expand to 996 households, of which 152 will be rental housing. Excluding the 840 owner-occupied households, only 4 units will be available for general sale, making the available general sale quantity nearly nonexistent, leading construction companies to evaluate the profitability as carrying significant risk. Compared to Sangye-jugong 8 Complex, where 141 out of 1,062 units were rental housing, the proportion of rental housing is relatively high.

The estimated fee per household for Sangye-jugong 14 Complex, which is currently pursuing redevelopment, is 198 million won based on an 84 square meter unit. Even if one moves from the smallest unit of 41 square meters, the fee is estimated to be around 583 million won, which is less than the burden of fees for Sangye-jugong 5 Complex. This is because Sangye-jugong 5 Complex has less land share than Complex 14, resulting in different business feasibility.

The ongoing lawsuit due to conflicts with GS Engineering and Construction has also had an impact. In January 2023, a contract was signed with GS Engineering and Construction for a construction cost of 334.2 billion won and a contract period of 48 months, but homeowners protested over the fee issue and canceled the contract in November of the same year. GS Engineering and Construction claimed it was an unilateral contract cancellation and filed a lawsuit for the return of a bid deposit amounting to 6 billion won and damages for loss of construction profit.

The redevelopment committee is hopeful that the city of Seoul's business correction coefficient (a system providing a floor area ratio incentive for areas with low land prices) will allow about 90 of the rental units (152 units) to be converted into general sale.

Construction companies pointed out that without securing additional business feasibility, selecting a construction company would be difficult. An official from a major construction company said, "Some construction companies have stated they are reviewing the project, but if promotional staff are withdrawn from the site, it is effectively a sign of losing interest," adding, "Without securing additional floor area ratios or general sales, it will be hard for construction companies to show interest."

Another construction company official commented, "Although construction costs have increased, overall material and labor costs have risen, making the 7.7 million won per unit still insufficient," adding, "The real estate market has worsened compared to when GS Engineering and Construction was selected as the construction company, and with rising construction costs, it seems there will be difficulties in proceeding with the project."