[Construction Site in Crisis] ① "Borrowing Private Loans to Pay Salaries"... Small Construction Companies Face 'Closure Risk' Due to Developer Bankruptcy

Small and Medium Construction Companies Forced into Bankruptcy and Closure
Concerns over Mass Closures of Local Small and Medium Construction Companies
84.3% of Unsold Houses Nationwide Are in Local Areas

Editor's NoteThe construction and housing industry is filled with deep sighs. Developers, contractors, and sales companies say that this year is more worrisome than last year, and next year even more so. Statistics indicating a recovery in the housing market hold little meaning for them. They point out that such data is limited to specific regions or large companies. Today, they are filled with concerns about which companies might close down next, and whether they themselves might have to shut down.

The CEO of Construction Company A, ranked within the top 20 in the Jeolla region, recently borrowed private loans to pay employees' salaries. Since the second half of last year, there has been almost no business, and even when projects proceeded occasionally, the soaring labor and raw material costs led to accumulating deficits. He is now seriously considering closing the company.

Small Construction Company B, which mainly operated projects in Gyeonggi Province, went bankrupt in April. This company, which primarily handled subcontracting work for several mid-sized construction firms, became a victim of domino bankruptcies triggered by the developer's insolvency.

The construction and housing industry is struggling due to the real estate market slump and tightening liquidity. Especially small and local construction companies with limited financial resources have been driven to bankruptcy and closure, unable to withstand the real estate downturn, credit crunch, and rising raw material prices. Increased housing transactions, tens of thousands to one subscription competition rates, reduced unsold units, revived housing purchase sentiment, and overseas construction order records hitting five-year highs are all unfamiliar stories to small construction firms.

248 General Construction Companies Closed in the First Half of the Year... Highest in 12 Years

A view of a construction site in Seoul. Not related to the article content. Photo by Jinhyung Kang aymsdream@

On the 24th, the Korea Construction Industry Research Institute analyzed closure announcements from the Construction Industry Knowledge Information System (KISCON) and found that 248 general construction companies closed in the first half of this year (January to June). This is a 65% increase from the same period last year (150 cases) and the highest number in 12 years since the first half of 2011 (310 cases), when the global financial crisis hit.

Among general construction companies, several mid-sized firms ranked between 100 and 300 also collapsed. This year alone, Daechang Enterprise (ranked 109), Shinil Construction (113), and HNI&C (133) entered rehabilitation procedures, while last year, Wooseok Construction (202), Dongwon Industrial Construction (388), and Daewoo Shipbuilding & Marine Construction (83) faced bankruptcy.

The construction industry structure broadly follows the order of client (developer) → main contractor (general construction company) → subcontractor (specialized construction firms), with general construction companies acting as main contractors. The increase in closures among mid-tier general construction companies indicates a rise in closures among developers and specialized construction firms as well. Subcontractors at the bottom tier are especially affected by the closures of main contractors.

In the first half of this year, 1,546 specialized construction companies reported closures. This is an 18.3% (283 companies) increase from 1,263 companies in the same period last year, marking the highest quarterly figure in the past five years.

Small Construction Companies Blocked from Bank Loans... Fear of ‘Chain Bankruptcies’ Looms

The construction industry is concerned about the mass bankruptcies of small construction companies in regional areas. This is due to the accumulation of unsold units and difficulties in cash recovery, which are worsening the financial difficulties of small regional construction firms.

In fact, the regional housing market remains severely depressed. According to the Ministry of Land, Infrastructure and Transport's 'May Housing Statistics,' out of 68,865 unsold units nationwide, 58,066 units (84.3%) are concentrated in regional areas. The prolonged unsold housing crisis is worsening rather than improving, and cases of existing contract holders defaulting on interim or final payments are rapidly increasing, causing serious liquidity problems.

The fear of ‘chain bankruptcies’ similar to those during the global financial crisis over a decade ago is looming. Financial institutions have begun reassessing housing companies with many unsold units, and rumors of large-scale restructuring are circulating.

Loans from financial institutions to regional and small construction companies are almost completely blocked. Recently, as savings banks have entered restructuring one after another, construction companies are struggling not only to secure new project PF loans but even to extend the maturity of existing loans. A representative from a mid-sized construction company explained, "Many construction companies are currently unable to secure operating funds to keep their businesses running."

Professor Han Mundo of Yonsei University's Graduate School of Political Economy, Department of Finance and Real Estate, said, "Small and medium-sized construction companies in regions without surplus funds have no stamina to endure the current real estate market slump and rising interest rates. Especially in regions where non-performing unsold units are rapidly increasing, mass closures of construction companies are a concern."

Increase in Construction Company Closures → Collapse of Supply System, Leading to Unemployment Crisis

The rise in construction company closures raises serious concerns about the collapse of the housing supply system and a potential unemployment crisis, making urgent countermeasures necessary. According to the Ministry of Land, Infrastructure and Transport, cumulative housing starts from January to May this year totaled 77,671 units, a sharp 47.9% drop compared to 149,019 units in the same period last year. The Seoul metropolitan area recorded 41,703 units, down 48.3% year-on-year, while regional areas had 35,968 units, down 47.4%. Compared to the average housing starts over the past 10 years, the metropolitan area decreased by 47%, and regional areas by 61%.

Pre-sale approvals have also declined. During the same period, nationwide apartment pre-sale figures were 46,670 units, down 51.5% from 96,252 units a year earlier. The metropolitan area recorded 28,554 units, down 40.7%, and regional areas 18,116 units, down 62.3%.

Housing orders for construction companies have also sharply declined this year. According to the Korea Construction Association, construction orders recorded 20.5652 trillion KRW in January, then dropped to 13.4494 trillion KRW in February, 13.5427 trillion KRW in March, and 10.9126 trillion KRW in April, marking four consecutive months of sharp decline. The total cumulative construction orders amounted to 58.4699 trillion KRW, a 44% decrease compared to the same period last year.

Considering that apartment move-ins typically occur 3 to 5 years after permits and 2 to 3 years after construction starts, the sharp decline in permits and housing starts is likely to directly lead to a future housing supply shortage. Real estate big data company Asil estimates that move-in volumes in 2025 will be 190,353 units, a 46% decrease compared to 2024, followed by 43,594 units in 2026 and 4,770 units in 2027, indicating a severe supply drought.

The rise in unemployment rates in the construction industry is already becoming a reality. According to Statistics Korea, the number of daily wage workers in the second quarter of this year was 1,087,000, a 9.1% (108,000) decrease compared to the same period last year. This is the largest decline since the first quarter of last year (-10.6%). Although daily wage workers have been decreasing for 15 consecutive quarters since the third quarter of 2019 (-2.1%), the recent rate of decline is accelerating.