1.5 Closures Per Day... Bankruptcies of Small and Medium Construction Companies Doubled

Mid-sized construction company A, which was carrying out public projects for government ministries and local governments, has recently fallen into crisis due to financial difficulties. Construction sites at about twenty locations have come to a halt, and employee salaries have not been paid for several months. Company A plans to overcome the crisis by borrowing funds secured by assets, but the outlook remains bleak.

The construction industry’s difficulties have intensified due to the ongoing real estate market slump and tightening liquidity since last year. In particular, small and medium-sized construction companies or regional construction firms without capital strength or brand power face growing concerns of closure or bankruptcy amid the economic downturn, rising raw material costs, increased loan interest rates, and a tightening real estate project financing (PF) market.

According to the Construction Industry Knowledge Information System (KISCON) on the 7th, a total of 370 comprehensive construction companies filed for closure from January this year to the 6th of this month. This is about twice the number compared to the same period last year (188 cases).

During this period, five comprehensive construction companies went bankrupt due to suspension of current accounts rather than voluntary closure. The number of bankruptcies among comprehensive construction companies was only one case each in 2020 and 2021, but has increased for two consecutive years with four cases last year.

The situation is even more severe for subcontractors, the specialized construction companies. From January this year to the 6th of this month, 2,022 specialized construction companies filed for closure, a 21.7% increase compared to 1,661 companies during the same period last year. This is the highest quarterly figure in the past five years.

In fact, in the case of Company A, which recently experienced financial difficulties, all 23 construction sites stopped completely from April due to unpaid material and labor costs. Among these 23 sites, 21 are public projects commissioned by the Ministry of Land, Infrastructure and Transport, Korea Land and Housing Corporation (LH), Korea Electric Power Corporation, Korea Water Resources Corporation, Public Procurement Service, Korea Railroad Corporation, and local governments. Acquisition taxes and four major social insurance premiums were also overdue, resulting in seizures, and employees’ salaries were confirmed to be delayed by several months. The workforce, which was about 130 at the end of last year, has shrunk to around 80 currently.

The increase in closures and bankruptcies of construction companies is interpreted as being due to the continued accumulation of unsold units after completion in local areas and the ongoing 'financial paralysis' phenomenon caused by the tightening PF market.

The rise in construction industry closures raises serious concerns about a future collapse of the housing supply system and a massive unemployment crisis, making urgent countermeasures necessary. According to the Ministry of Land, Infrastructure and Transport, the cumulative number of housing starts from January to July this year was 102,299 units, a sharp decline of 54.1% compared to the same period last year. During the same period, nationwide housing permits totaled 207,278 units, down 29.9% from 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 drop in permits and starts is likely to directly lead to a future housing supply shortage. Real estate big data company Asil estimates that the number of move-ins 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.