[Construction Site in Crisis] ② 7 to 8 out of 10 Construction Companies Are 'Zombie Workplaces'

Small and Medium Developers Who Failed PF Conversion Barely Cover Interest
Concerns Over Wave of Bankruptcies After Next Year's General Election
Sales and Promotion Industries Struggle with Outstanding Payments

#. A real estate development company (developer) A, which was preparing a housing project in Cheonan, Chungnam, recently halted the project. This was due to the failure to secure project financing (PF) funds. The funds invested during the preparation of the project and the interest on the existing bridge loan (short-term loan for initial land purchase and permits) accumulated, resulting in losses of several billion won. Thanks to the government pressuring financial institutions to extend the bridge loan, the company avoided bankruptcy, but it has effectively become a 'zombie project' that cannot proceed.

[Image source=Yonhap News]

According to the development industry on the 24th, there are criticisms that various PF measures introduced by the government at the end of last year to prevent a hard landing in the real estate market are a 'pipe dream' for small and medium-sized developers. In fact, although the government implemented a 2.5 trillion won scale ‘PF loan guarantee’ through the Housing and Urban Guarantee Corporation (HUG) in early January, the amount of new PF guarantees and policy financing provided from January to April remained at 900 billion won. HUG evaluates factors such as project location, cash flow, the construction company's ranking in construction capability, and HUG's own credit rating during the loan execution review. Projects with weak financial structures or PF loans for projects on the outskirts of the metropolitan area are practically unlikely to pass the review. Especially in provincial areas, successful cases of PF loan guarantees are even harder to find.

To receive a PF loan guarantee, the project seeking the guarantee must submit the required documents, and HUG issues a guarantee certificate after conducting a business guarantee review and committee approval. During this process, HUG requests a letter of intent for the loan from the project. The letter of intent submitted to HUG must include a letter of credit intent for the PF loan issued by banks, but recently, financial institutions have been reluctant to invest in real estate PF projects, making issuance difficult.

Thanks to the government guiding financial institutions to uniformly extend existing bridge loans, most projects have avoided bankruptcy. However, once the extension period ends, most will be zombie projects that will be declared bankrupt. Industry insiders predict that about 70-80% of small and medium-sized developers’ projects are zombie projects.

A developer CEO said, "There are many projects that failed to secure bridge loans even after contracts, or failed to convert bridge loans to PF loans," adding, "Since the financial sector is saying that the government-guaranteed bridge loan extension will only last until next year's general election, many developers will declare corporate financial restructuring (workout) next year."

The crisis in the development industry is also affecting the sales and promotion sectors. Several sales and promotion agencies have not been properly paid by developers. Cases where projects were prepared but did not proceed, or where sales were made but unsold units resulted in unpaid balances, have increased significantly this year.

According to the real estate platform Zigbang, out of 37,733 units scheduled for sale in June (29,646 general sale units), only 9,766 units (8,368 general sale units) were sold as planned. The sales performance rate in May was also low at 22%, and June’s sales performance was below the planned volume. It is said that if contracts were made through large construction companies, the possibility of failing to recover unpaid balances is lower, but if contracts were made directly with developers, the burden of recovering unpaid balances is higher.

A representative of agency A, which is in charge of sales promotion for a major domestic construction company, said, "Subjectively, the volume in the first half of this year has halved compared to last year," adding, "The halving of sales is a problem, but the scale of unpaid balances reaches 3 to 4 billion won. Because of concerns that unpaid balances might be lost if the developer goes bankrupt, we are chasing unpaid balances like loan sharks."