[Aftermath of PF Crisis]③ "Absolutely Can't Build" Contract Deposits Repaid by Construction Companies Surge 5 Times in One Year

Construction Guarantee Association's Contract Guarantee Payments Reach 100 Billion Won Last Year
Proportion of Total Guarantee Amount Also Soars
Project Suspensions Lead to Cancellation of Occupancy by Buyers, Interest Not Refunded
Association's Profits Decline, Operating Profit Margin Halved

The Construction Guarantee Association, the largest construction guarantee institution in Korea, saw the contract deposits it paid on behalf of contractors nearly 3.6 times increase in one year. This growth in the association's payment amount is due to contractors abandoning construction midway amid a real estate market downturn and financial difficulties. Consequently, concerns are rising that buyers may suffer greater damages such as delays in move-in schedules and interest losses.

According to data obtained by Asia Economy from the Construction Guarantee Association on the 5th, the association's contract guarantee payment amount last year was about 100 billion KRW, approximately 3.6 times higher than the previous year (27.9 billion KRW). The contract guarantee payment amount had remained below 50 billion KRW for some time, recording 41 billion KRW in 2019, 22.7 billion KRW in 2020, 47 billion KRW in 2021, and 27.9 billion KRW in 2022.

The proportion of contract guarantees within the association's total guarantee payment amount also increased significantly. As of last year, it accounted for 56% (100 billion KRW out of 180 billion KRW), up 10 percentage points from 46% the previous year. Although the association's total guarantee payment amount also rose sharply from 61 billion KRW in 2022 to 180 billion KRW last year, the increase in payment amount due to contract guarantee incidents was even more pronounced. The total guarantee payment amounts were 88 billion KRW in 2019, 63.1 billion KRW in 2020, and 84.4 billion KRW in 2021.

Contract guarantees are one of the Construction Guarantee Association’s representative guarantee products that guarantee the contractor’s obligation to pay the contract deposit to the client. The increase in contract guarantee payments indicates that the number of construction companies halting ongoing projects due to bankruptcy or insolvency has risen.

[Aftermath of PF Crisis]③ "Absolutely Can't Build" Contract Deposits Repaid by Construction Companies Surge 5 Times in One Year

Experts agree that damages to buyers are inevitable as the number of abandoned projects increases. Kim In-man, director of Kim In-man Real Estate Economic Research Institute, said, "Delays in move-in schedules or cancellations of move-ins themselves inevitably cause significant disruptions to buyers' housing plans."

There are no adequate measures to compensate buyers for their financial losses. Director Kim explained, "In cases where the project is insured by the Housing and Urban Guarantee Corporation (HUG), contract deposits and interim payments can be refunded, but loan interest is excluded from the guarantee coverage," adding, "For apartments priced around 1 billion KRW, the interest amount is by no means insignificant."

As guarantee payments and bad debt costs (amounts unrecoverable from construction companies) increase, the association’s profits are declining. As of June last year, the association’s operating profit margin was 10.19%, less than half compared to 31.35% in 2021 and 31.65% in 2022. The total asset growth rate, which had shown growth, fell from 3.81% in 2021 to 0.71% in June 2023. The operating revenue growth rate also dropped from 8.05% to -0.42% during the same period.

As of last year, the Construction Guarantee Association is Korea’s largest construction finance institution with 13,800 member companies and a guarantee balance of 173 trillion KRW. It provides financial services such as guarantees, loans, and mutual guarantees to its members. Regarding guarantees, it supports each construction phase from ordering, contracting, construction, to completion. It plays a role in supplementing the credit of low-credit construction companies that are blocked from financial sector loans such as real estate project financing (PF) loans, while protecting the property rights of clients.

Yoon Soo-min, a real estate specialist at NH Nonghyup Bank, explained, "The increase in guarantee payments means that many accidents occurred during the construction process, indicating a negative overall situation in the construction industry."