Accumulating Unsold Units, Growing Debt... Construction Industry Faces Wave of Bankruptcies

Photo by Asia Economy

As the real estate market downturn prolongs, unsold housing units are increasing and the debt-to-equity ratio of construction companies is soaring, raising alarms about a wave of bankruptcies in the construction industry.

According to data titled 'Housing Transaction Volume and Increase in Unsold Housing Units Over the Past 5 Years' received by Kim Byung-wook, a member of the National Assembly Land, Infrastructure and Transport Committee from the Ministry of Land, Infrastructure and Transport, unsold housing units, which numbered 17,710 in 2021, have nearly doubled to 31,284 in just the first seven months of this year.

During last year, 12 companies went bankrupt, and already 8 companies have gone bankrupt up to July this year. Among them, one large construction company with sales between 50 billion and 100 billion KRW has also gone bankrupt, heightening industry concerns about a wave of bankruptcies among construction firms.

Source: Office of Assemblyman Kim Byung-wook

The problem is that this crisis is only the beginning. The industry believes that a significant number of construction companies are at risk of bankruptcy.

According to the Bank of Korea’s 2022 Q2 Corporate Management Report (partial excerpt attached), released in September, the debt ratio in the construction industry has sharply increased from 120.8% in Q4 2021 to 135.6% in Q2 this year.

The reliance on borrowings also surged from 25.3% to 27.3%, signaling a full-scale deterioration of construction companies. Especially as banks tighten real estate project financing (PF) loans, construction companies are facing a triple burden of rising interest rates, unsold inventory, and stricter lending. If this trend continues, industry insiders do not rule out the possibility that dozens of small and medium-sized construction companies may enter workout programs by the end of the year.

Assemblyman Kim Byung-wook stated, "If a perfect storm crisis is predicted and a wave of bankruptcies among construction companies occurs, it will lead to higher unemployment and an accelerated economic downturn, creating a vicious cycle," adding, "The government must take measures to minimize the damage caused by the wave of bankruptcies among construction companies."