[THE Tilted Real Estate]③ Rapid Increase of Malignant Unsold Units in Provinces... Apartments with Lights Out Multiply

‘Manchon Jaileune’ in Suseong-gu, Daegu, which began occupancy last January, has four out of five households vacant. Despite being a large complex with 607 households in a location known as the Gangnam of Daegu, it remains unsold even after completion due to a sharp drop in surrounding apartment prices. The developer even lowered the sale price by about 200 to 300 million KRW, but there are still no buyers.

[Image source=Yonhap News]

Four out of Ten New Apartments in Provincial Areas Are ‘Vacant’

The fear of unsold units is tightening the grip on the provincial housing market. As of the end of February this year, there are a total of 75,438 unsold houses nationwide. Among them, 8,554 units are classified as chronic unsold (unsold after completion), accounting for 11.3%. Although the figures alone do not seem severe, the problem lies in the increasing trend.

Chronic unsold units increased by 13.4% (1,008 units) in February alone. This is the first time in 32 months since June 2020 that the number has increased by more than 1,000 units in a single month. Particularly concerning is that chronic unsold units are concentrated in provincial areas, reaching 7,071 units nationwide.

In provincial areas, not only are there many unsold units, but occupancy rates are also low. As of the end of March, apartment occupancy rates have not exceeded the 60% range. Daegu, Busan, and Gyeongsang region recorded 60.1%, Gangwon region 60.0%, Daejeon and Chungcheong region 64%, Gwangju and Jeolla region 64.2%, and Jeju region 68.3%. In other words, four out of ten new apartments in provincial areas are vacant. In contrast, Seoul (76.2%) and Incheon-Gyeonggi region (72.3%) show occupancy rates in the 70% range.

The difference in occupancy rates between the metropolitan area and provincial areas is analyzed to be related to the recovery of housing transactions. Due to the government's major deregulation measures such as the 1·3 Real Estate Measures, some areas in the metropolitan region have seen rapid depletion of urgent sale properties, increasing transaction volumes and reducing the rate of house price declines.

According to the Seoul Real Estate Information Plaza, apartment transactions in Seoul from January to March this year totaled 4,328, surpassing the 3,345 transactions in the same period last year, and apartment prices have seen a reduction in the rate of decline for five consecutive weeks. Since delayed sales of existing homes accounted for 44.4% of the reasons for non-occupancy last month, the difference in occupancy rates between the somewhat revived metropolitan area and the stagnant provincial areas is evident.

551 Small and Medium-Sized Construction Companies in Provinces Closed in Q1

Given this situation, closures of small and medium-sized construction companies in provincial areas are occurring one after another. The sequence is ‘increase in unsold apartments → increase in chronic unsold units → liquidity crisis → bankruptcy.’ Especially for mid-sized companies focusing on housing projects, efforts to clear unsold units are in full swing, but the industry's outlook is pessimistic.

According to the Construction Industry Knowledge Information System (KISCON), 926 general and specialized construction companies closed in the first quarter of this year (excluding 19 withdrawals). This means more than 10 companies closed every day on average.

This is a 14.0% increase from 796 closures (excluding 13 withdrawals) in the same period last year and the highest number since 1,208 closures recorded in 2014.

Closures are concentrated in provincial areas. Construction companies based in Seoul that reported closures in the first quarter numbered 118, accounting for 12.7% of all closures. Construction companies in the metropolitan area excluding Seoul numbered 257 (211 in Gyeonggi, 46 in Incheon), accounting for 27.7%, while the remaining 551 (59.5%) were based in provincial areas.

The main causes of the increase in construction company closures include tightening financial markets and rising raw material prices. The burden of loan interest increased due to the base interest rate hikes, and combined with the real estate market downturn, liquidity problems among construction companies worsened. Additionally, rising raw material prices and a shrinking sales market led to decreased profitability.

Large construction companies managed to endure with their own cash reserves, but small and medium-sized construction companies could not hold on. Especially since most small and medium-sized construction companies operate based in provincial areas, closures among provincial small and medium-sized construction companies inevitably increased. The Bank of Korea estimates that 16.7% of provincial small and medium-sized construction companies are ‘zombie companies’ that cannot even pay interest with their annual income.