"Let's Avoid Risk"... Construction Companies Focus on 'Reconstruction and Redevelopment' as PF Crisis Erupts

Large Construction Companies Increase Proportion of Reconstruction and Redevelopment Sales This Year

No PF Guarantee Risk Due to Member-Centered Approach, Low Concern Over Unsold Units

Focus on Maintenance Projects in Seoul and the Metropolitan Area

[Image source=Yonhap News]

Following the real estate project financing (PF) crisis, there is a forecast that the supply volume of urban renewal projects (hereinafter referred to as renewal projects), including reconstruction and redevelopment, will significantly expand this year. Reconstruction and redevelopment projects are centered around association members, meaning construction companies do not have to bear guarantee risks and the concern over unsold units is low.

Some even predict that the planned supply volume for renewal projects will be the highest since 2000. On the 10th, the government allowed reconstruction procedures to begin without safety inspections for apartments over 30 years old after completion, which is also expected to contribute to expanding the supply volume of renewal projects.

Construction Companies Prefer Stability After PF Crisis

According to the construction industry on the 17th, major construction companies such as Hyundai Engineering & Construction, Daewoo Engineering & Construction, and GS Engineering & Construction are significantly increasing the supply volume of renewal projects (both association and general) this year compared to last year. Hyundai E&C plans to nearly triple its supply from 3,411 units last year to 9,837 units this year. This includes Gangnam area complexes such as The H Bangbae (general 1,251 units) and Banpo The H Clast (association 3,536 units). GS E&C also plans to increase from 11,380 units last year to 13,000 units this year, with Gwacheon Jugong 4 Complex (1,445 units) and Gwangmyeong 12R District (2,097 units) as representative projects.

Daewoo E&C will release its first supply volume in renewal projects this year. Daewoo E&C will open the model house for Bucheon Songnae Station Prugio Centbien (Songnae 1-1 District Housing Reconstruction Renewal Project) on the 26th. A site official from Centbien said, "Out of the total 1,045 units, 820 units (80%) are for association members, and 225 units will be offered for general sale this time." He added, "The reconstruction apartments near Bucheon Sosa Station that were supplied last year had a subscription rate of about 6 to 1, but Centbien has a better location with double subway access, so it is expected to sell smoothly."

Daewoo E&C’s supply volume for renewal projects increased from 3,787 units last year to 4,178 units this year. A Daewoo E&C official explained, "Last year, we achieved the highest order volume in the industry with 1.4057 trillion KRW in Seoul renewal projects." He added, "Focusing on Seoul renewal projects during a period of significant increases in construction costs and interest rates was a strategy to strengthen our fundamentals." Daewoo E&C is also targeting orders for reconstruction projects such as Gaepo 5 Complex and Sinbanpo 2nd and 16th reconstruction projects this year.

Because the burden on construction companies is not large due to the nature of renewal projects, construction companies are expanding their supply volumes in this sector. A representative from Construction Company A said, "The construction company PF problem occurred because the developer could not repay the money borrowed to buy land when starting the project, which became a contingent liability for the construction company that guaranteed the developer." He explained, "In reconstruction and redevelopment projects, when raising funds, association members use the land shares they already own as collateral, so the financial risk burden is much lower."

Another advantage is the low possibility of unsold units. A representative from Construction Company B said, "Usually, about 70-80% of the units in a complex are already allocated to association members." He added, "From the construction companies’ perspective, this reduces worries about construction cost arrears due to unsold units."

Construction Cost and Interest Rate Increases Are Obstacles

However, there are risks unique to renewal projects. These include rising construction costs due to inflation, high interest rate burdens, and internal conflicts among association members. Hyundai E&C halted construction on the Hillstate Mediale redevelopment project in Eunpyeong-gu Daejo 1 District on the 1st due to rising construction costs and the absence of an association representative. A real estate industry official said, "In the case of Noryangjin 3 District, where POSCO E&C is the contractor, construction costs have risen, causing association members to face much higher contributions than initially expected, leading to difficulties."

A representative from Construction Company C said, "Even though contractors previously promised not to raise construction costs, recently they have sent official letters increasing costs, causing association members’ contributions to rise at many sites." He added, "Although the government has relaxed regulations to accelerate renewal projects, there are factors that worsen project profitability, so it remains to be seen how effective these measures will be."