Sharp Increase Compared to '0 Cases' in 2021-2022
Difficult to Find Successor Construction Companies Amid Recession
#. The buyers of the apartments at 'Geumchon Station Shinil Happy Tree The Roots' (a local housing cooperative) in Geumchon-dong, Paju-si, Gyeonggi Province, have been losing sleep over their apartments since last year. This is because Shinil, a mid-sized construction company responsible for the construction, entered court receivership (corporate rehabilitation procedure) on May 31 of last year. After Shinil applied for court receivership and was put up for sale for mergers and acquisitions (M&A), the construction sites under progress were classified as sites with sales guarantee accidents. It is said that construction has stopped at many sites, including this apartment complex. At least here, they are trying to find a construction company to continue the work and complete the move-in, but the increased construction costs and delays in the move-in schedule have become the burden of the buyers.
Last year, the number of sales guarantee accident cases, such as at Geumchon Station Shinil Happy Tree The Roots, reached the highest level in 11 years. Compared to 2021-2022, when there were virtually no guarantee accidents, the difference is significant. The recession in the construction industry caused by high interest rates and high inflation has left deep scars on the sales market, and the results are increasingly appearing as guarantee accidents.
Rapid Increase in Sales Guarantee Accidents
According to the Housing and Urban Guarantee Corporation (HUG) on the 29th, the number of guarantee accident cases due to construction stoppages and delays last year was 12, the highest in 11 years since 2012 (12 cases). The accident amount was approximately 851.262 billion KRW.
Under current law, housing sales projects with 30 or more households must subscribe to HUG sales guarantees. If a situation arises where it is difficult to expect the principal debtor to carry out the normal housing sales plan, the project is classified as a guarantee accident site according to certain conditions.
HUG defines specific reasons for guarantee accidents as follows: the principal debtor’s default, bankruptcy, or abandonment of the project; when the construction progress rate confirmed by the supervisor falls short by more than 25 percentage points compared to the plan, and the guarantee creditor (buyer) demands performance; or when construction is halted for more than three months due to the contractor’s default or bankruptcy, and the guarantee creditor demands performance.
HUG explained that guarantee accidents are cyclical with the economy and have not been many except during times when many construction companies went bankrupt due to the IMF foreign exchange crisis and the global financial crisis, but last year was exceptional. The number of guarantee accidents in the previous five years was 1 in 2018, 1 in 2019, 8 in 2020, 0 in 2021, and 0 in 2022. Against this backdrop, the surge in guarantee accidents means that last year’s construction industry recession and high interest rates intensified the financial difficulties of construction companies.
A HUG official said, "Last year, many guarantee accidents occurred as Daewoo Industrial Development, Shinil, and others entered rehabilitation procedures," adding, "Buyers at each site are currently choosing how to proceed."
Many Likely to Choose Refund Performance Due to Project Feasibility Issues
There are two ways to proceed. One is refund performance, where the guarantee creditor receives back the contract deposit and interim payments paid; the other is sales performance, where another construction company takes over the project, completes construction, and finishes the move-in. In this case, projects with a progress rate of 80% or more are automatically decided as sales performance. For refund performance, at least two-thirds of the buyers must agree.
Currently, HUG reported that two sites, including 'Inter-Burgo Lavida' in Janggi-dong, Dalseo-gu, Daegu, have decided on sales performance, while three sites, including 'Onyang Valley Shinil Happy Tree The Roots' in Onyang-eup, Ulju-gun, Ulsan, have decided on refund performance. Discussions among buyers are ongoing at the remaining sites.
Industry insiders expect that many will choose refund performance unless the project has excellent location or future value. It is also difficult to find successor contractors to continue construction during a recession. A construction company official said, "Even projects with reasonably good feasibility carry risks in suddenly continuing construction, and sites where construction was halted due to contractor bankruptcy are naturally avoided," adding, "There are concerns that guarantee accidents will continue to occur mainly at local sites of mid-sized and small construction companies this year as well."
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