Accumulating Unsold Units: Will Developers' Failures Lead to Construction Companies' Bankruptcies?

Tension Arises Over Real Estate PF Risk Management Moves

Financial companies have started strict management of distressed construction sites due to increased construction periods and unsold units, causing tension in the construction industry.
[Image source=Yonhap News]

[Asia Economy Reporter Cha Wanyong] A sense of crisis is rapidly spreading in the construction industry. As the real estate market atmosphere becomes uneasy due to interest rate hikes, raw material price increases, and a rise in unsold units, the financial sector that provided real estate project financing (PF) loans is showing signs of moving into risk management such as fund recovery.

According to the construction and investment banking (IB) industries on the 15th, financial companies that had provided real estate PF loans have recently started or are reviewing strict management of troubled projects with extended construction periods and occurrences of unsold units.

In one local project with unsold units, the major creditor (financial institution that lent funds) requested the trust company managing the project loan to recover funds, causing the developer to suffer financial pressure.

If this developer fails to manage cash flow and files for bankruptcy, the contractor will suffer significant damage. If a payment guarantee was provided, the contractor must bear the developer’s debt, and even if no payment guarantee was made, the contractor will not be able to properly receive construction payments. If the construction company’s financial condition is poor, it may also face a risk of bankruptcy.

In fact, during the collapse of the domestic real estate market following the 2008 global financial crisis, mid-sized construction companies ranked around 40th in construction capability evaluation (such as Kumho Industrial, Gyeongnam Enterprise, Byuksan Construction, Poonglim Industrial, Sambu Construction, Daeju Construction, Samhwan Enterprise, Shindonga Construction, Dongyang Construction Industry, Namgwang Tokon, Imkwang Tokon, etc.) went bankrupt due to the aftermath of PF loans or payment guarantees for their own projects or developers.

Developers and construction companies are on high alert. Several projects have failed to meet construction deadlines due to rising labor and raw material costs, and unsold units are increasing due to the real estate market downturn caused by interest rate hikes.

According to data from the Ministry of Land, Infrastructure and Transport, as of the end of June, the total number of unsold houses nationwide was 27,917, an increase of more than 57% compared to 17,710 at the end of last December.

In particular, unsold houses in the metropolitan area, which had been selling out immediately due to supply shortages, surged nearly threefold to 4,456 units compared to 1,506 units at the end of last December. The so-called "malignant unsold units," or "post-completion unsold units," were found to total 7,130 nationwide, and this number is expected to increase further in the second half of this year.

A construction industry official said, “If the financial sector proceeds with loan recovery in the current unfavorable real estate market situation, not only developers but also small and medium-sized construction companies will face bankruptcy risks,” adding, “If a domino effect of bankruptcies becomes a reality, the negative impact on the national economy will be significant, so government-level management is necessary.”