[Click e Stocks] Unsold Units Increased but "PF, Still Okay"

Concerns Over PF Defaults Rise with Increasing Unsold Units
Large Construction Firms Have Low PF Loan Guarantee Balances,
Accumulate Cash, Secure Projects Through Guaranteed Completion
Concerns Over Reduction in Sale Volume

On the 30th, with rain falling mainly in the central region, officials are working on setting up the pre-event for the '7 Days of Companionship Festival' at Gwanghwamun Square in Seoul despite the bad weather. Photo by Mun Ho-nam munonam@(unrelated to the article)

[Asia Economy Reporter Junho Hwang] Although unsold housing units are increasing due to tighter financing conditions caused by interest rate hikes and an economic slowdown, it is still too early to worry that large construction companies will be severely impacted by distressed project financing (PF).

Seohyun Jeong, a researcher at Hana Securities, stated on the 20th, "While it is true that the burden on the primary contractor providing PF guarantees increases when a sales project fails, it is ultimately premature to have excessive concerns about the PF risks of large construction companies."

The current sales market is unfavorable. The number of unsold units, which was only 18,000 at the end of last year, has now increased to over 30,000 units. As of June, the so-called "malignant inventory" of unsold units after completion is also on a monthly upward trend. Regionally, the increase in unsold units is greater in local areas centered around Daegu and Gyeongbuk than in the metropolitan area. Amid the growing unsold inventory, the initial contract rate, which exceeded 96% last year, has dropped to the 87% range this year. The first-priority subscription competition rate nationwide has also fallen from an average of 19 to 1 last year to 9.3 to 1 currently.

However, the outstanding balance of PF loan guarantees by large construction companies such as Hyundai Engineering & Construction, GS Engineering & Construction, and DL E&C is about 4.3 trillion won as of the end of the second quarter. This is significantly lower than the 12.4 trillion won during the 2008 financial crisis. They also hold 8.8 trillion won in cash and cash equivalents, indicating strong financial buffers. Recently, large construction companies have been participating in projects in a risk-limited responsibility completion form, meaning they are not liable for debts arising from developer insolvency. In the past, most contractors provided credit enhancement through joint guarantees, and if developers became insolvent due to sales failures, the contractors had to bear the project debts. Responsibility completion refers to a project type where the contractor does not have to assume debt as long as the project is completed.

Researcher Seo explained, "Most of the sales volume of large construction companies is concentrated in the metropolitan area, which has high project feasibility, so the risk of unsold units is relatively low. Although some large construction companies are experiencing unsold units in local areas such as Daegu, sales rates are gradually improving over time, so PF repayments are expected to proceed without major difficulties."

However, she pointed out, "The concerning aspect is that with rising interest rates and sales prices, coupled with shrinking sales demand, a gradual decrease in sales volume is expected."