Concerns Over Unsold Units, Reluctance in Bidding Due to Construction Cost Increases
Intensified Conflicts in Construction Cost Negotiations with the Association Also Play a Role
Future Supply Gaps Lead to Housing Price Instability
Due to the slump in the housing market and rising raw material prices, many reconstruction and redevelopment projects are struggling to find construction companies. Construction firms, facing intensified conflicts over construction costs with associations, are withdrawing with the sentiment that "the more contracts we win, the more we lose." Experts point out that if redevelopment projects are not carried out in a timely manner, regions with a shortage of new housing sites, such as the metropolitan area, could face increased instability with sharp rises in jeonse (long-term deposit lease) and housing prices.
Reconstruction Contract Amounts Down More Than 30% Compared to a Year Ago
According to the 'February 2023 Monthly Construction Economic Trends' report published by the Korea Construction Association on the 7th, the total domestic construction contract amount for construction companies in February was 13.4494 trillion won. This represents a decrease of 651.7 billion won (4.6%) compared to the same period last year.
In particular, contract amounts for residential construction (housing) plummeted. The contract amount for residential construction, which includes reconstruction, redevelopment, and new housing projects, was 3.6604 trillion won, down 27.8% (1.4105 trillion won) from 5.0709 trillion won a year earlier. This is the lowest figure in 48 months since February 2019 (2.6626 trillion won). The number of contracts was 172, a 32.9% (84 contracts) decrease compared to 256 contracts in the same period last year. Looking only at the private sector, the number of contracts dropped 34.6% (65 contracts) from 188 in February last year to 123 this February.
Especially, the contract amount for reconstruction projects, which involve demolishing existing apartments and building new ones, fell by more than 30% in one year to just 268.5 billion won. Although redevelopment contract amounts more than doubled from 983 billion won a year ago to 1.9008 trillion won, this increase is largely due to the Gwangcheon-dong redevelopment project in Seo-gu, Gwangju (1.766 trillion won), considered the largest redevelopment project nationwide this year, making it difficult to view the overall trend as an increase.
Namseong Mansion in Mullae-dong Fails to Find Construction Company After Five Attempts
The reluctance of construction companies to bid is commonly seen even in Seoul, not just in provincial areas. The reconstruction association of Namseong Mansion in Mullae-dong, Yeongdeungpo-gu, held five rounds of bidding for a construction company but ultimately failed to select one. Until last year, large construction firms such as Samsung C&T and POSCO E&C seemed interested, but only Lotte Construction submitted a bid. When only one construction company bids, the bid is forcibly canceled, and only after two or more cancellations can a sole bidder negotiate a private contract, so the association has yet to find a construction company. Although the association raised the construction cost from 5.25 million won to 7.19 million won per 3.3㎡ and offered to reduce the bid deposit from 9 billion won to 5 billion won, these measures were ineffective.
The reconstruction association of ‘Gongdeok Hyundai’ in Gongdeok-dong, Mapo-gu, also failed to select a construction company due to no bidders. They plan to hold a re-bid soon. Additionally, the Cheongnyangni 8 District in Dongdaemun-gu held two bidding rounds for construction companies, but with only Lotte Construction participating alone, the bid was forcibly canceled.
Long-Term Supply Gaps Could Trigger Housing Price Instability
The reason why fierce bidding competition has quieted down is due to concerns over unsold units amid the real estate market slump, along with sharply increased construction costs caused by rising raw material prices and interest rate hikes. Moreover, recent conflicts over construction cost negotiations with associations have reached a peak, leading to the calculation that building apartments results in more losses than gains.
If the selection of construction companies is delayed, redevelopment projects like reconstruction and redevelopment cannot proceed quickly, ultimately delaying housing supply. While housing supply delays may not be a major issue immediately, a future supply gap could become a trigger for instability in the real estate market. Park Hapsu, an adjunct professor at Konkuk University Graduate School of Real Estate, said, "It has been seven months since the announcement of measures to ease reconstruction burdens, but there has been no progress. Delays in reconstruction projects ultimately lead to housing supply shortages and price increases, so related regulations should be boldly abolished."
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