[Why&Next] 156,000 Apartments with Delayed Completion... Increased Sevenfold in Two Years

Sharp Increase in Housing Construction Sites Missing Completion Deadlines
23000 in 2021 → 76000 in 2022 → 156000 Last Year

Complex Factors Including Rising Construction Costs, Reconstruction Conflicts, High Interest Rates, and PF
Expected Decrease in Move-in Volume, but Limited Impact on Housing Prices

#1. 'Urgent Recruitment for Lawsuit Participants from Households Unpaid Delay Compensation. Applications Open from January 29.' This was a notice posted last month on the bulletin board of an apartment complex in Seoul. After the construction company notified on June 26 last year that the completion would be delayed, the move-in was postponed by several months. Despite finally moving in after many difficulties, households that have yet to receive delay compensation are preparing a class-action lawsuit.

#2. "We expected to spend this Lunar New Year in our new home, but we never imagined it would turn out like this." Buyers of the A officetel in Suwon, Gyeonggi Province, said this during a rally held in front of Suwon City Hall on the 8th. Afterwards, they held a head-shaving ceremony. Although the scheduled move-in date was January 31, there is still no certainty about when they can move in. Conflicts escalated as the construction company rushed work to meet the deadline, leading to controversies over poor construction.

It has been revealed that the number of houses unable to meet completion deadlines is rapidly increasing due to rising construction costs including raw materials and labor, conflicts over reconstruction and redevelopment projects, high interest rates, and issues with real estate project financing (PF).

According to an analysis by Jo Jeong-hyun, a researcher at IBK Investment & Securities' Innovative Enterprise Analysis Department, as of November last year, the nationwide delayed housing completion volume was estimated at 156,000 units. This is about seven times higher than the 23,000 units recorded in December 2021, when real estate prices peaked.

Delayed Completion Increases Liquidity Risks for Construction Companies

Researcher Jo stated, "Since COVID-19, the construction period for housing has ranged from a minimum of 26 months to a maximum of 48 months," adding, "Cases where the construction period after groundbreaking exceeded this average were counted as delayed completions." At the end of 2019, during the ultra-low interest rate period, delayed housing units were about 6,000. This number began to rise sharply from late 2022 (76,000 units), reaching a peak of over 150,000 units last year.

The delay situation in provincial areas is more severe than in the metropolitan area. As of November last year, the delay rate in provinces (the ratio of units not completed compared to expected completion) was 31.8%. This is a significant increase compared to 6.5% at the end of 2021 and 11.4% at the end of 2022. During the same period, the metropolitan area's delay rate also rose from 3.5% to 15.5% and then to 23.2%. Although lower than in provinces, the sharp increase is similar.

Researcher Jo analyzed, "Construction companies that failed to meet the contractual completion deadlines are exposed to the risk of having to assume the debts of the project developers as penalties, raising contingent liability issues." Debt assumption means that the construction company must repay the principal and interest to the main lenders involved in the PF project on behalf of the developer.

He also analyzed, "There is a possibility of liquidity risk arising because delay compensation must also be paid to residents." According to the Housing Act, if the scheduled move-in date stated in the recruitment announcement is not met, the construction company must pay compensation with overdue interest applied to the move-in deposit. The overdue interest rate is an annual average of 5%.

Construction Costs Expected to Rise Further This Year

The number of projects delayed due to rising construction costs and conflicts over increased costs in redevelopment projects has surged. Kim Ji-hye, a senior researcher at the Korea Research Institute for Human Settlements, explained, "Cement and ready-mixed concrete prices rose by more than 20% in 2022 compared to the previous year, and last year also saw an increase close to 10%." According to the Construction Industry Research Institute, the construction cost index (base year 2015 = 100) soared 25.8% from 121.8 in December 2019 to 153.26 in December last year over three years.

Last year, the average daily wage of construction workers (265,516 KRW) also increased by about 7% compared to the previous year (248,819 KRW). Researcher Kim added, "Due to a shortage of skilled construction workers, labor supply has become unstable, reducing construction efficiency," and "This has caused delays in construction, leading to additional site maintenance and financial costs."

Noise from redevelopment and reconstruction sites continues unabated. A representative case is the Daejo 1 District in Eunpyeong-gu, Seoul, where construction was halted from the 1st of last month due to unpaid construction costs. In dispute sites, the Korea Real Estate Board is often requested to verify construction costs to determine the cause of cost increases, and the number of such requests surged to 30 last year. In 2019, there were only three cases. However, due to poor design and specification documents, even the Real Estate Board finds it difficult to verify facts. Ultimately, the construction cost conflicts are increasingly escalating into legal disputes, according to the construction industry.

If developers or construction companies face financial difficulties, construction may suddenly stop. Professor Kwon Dae-jung of Sogang University Graduate School of Real Estate said, "As the real estate market declines, project profitability decreases, and rising interest rates make it difficult to pay PF interest, causing construction to halt after groundbreaking, which is becoming a problem in provincial areas." The 'Ham-an Nam-myeong The Rau' project, the first local housing association redevelopment project in Ham-an, Gyeongnam, failed after switching to PF and stopped construction in November 2021 while installing the first-floor framework. The construction company Nam-myeong Construction went bankrupt last month after failing to recover construction payments.

This year, additional factors for construction cost increases exist, potentially worsening the delayed completion problem. Researcher Kim warned, "From this year, the 'Zero Energy Building' mandate for private apartments with 30 or more units will begin," adding, "With stricter inter-floor noise standards and expanded electric vehicle charging facilities, construction costs are expected to rise further."

Reduced Move-in Volume but Limited Price Impact Due to Market Slump

Apartment viewed from Yongsan-gu, Seoul on the 5th. Photo by Jinhyung Kang aymsdream@

Delayed apartment completions reduce the volume of move-ins. KB Financial Group's Management Research Institute forecasts 11,422 move-ins in Seoul this year. Compared to 2012, when the real estate market experienced a historic slump after the global financial crisis (20,336 units), this is nearly 10,000 fewer units. The total move-ins in the metropolitan area, including Seoul, Incheon, and Gyeonggi Province, are expected to be 150,628 units, a 21.1% decrease compared to the five-year average of 187,859 units.

When move-in volumes shrink like this, rental prices tend to rise first, followed by a delayed increase in sales prices. However, due to the real estate market slump, the impact of delayed completions on the market is expected to be limited.

According to the Korea Real Estate Board's survey of weekly apartment price trends nationwide in the first week of February, rental prices in major areas rose by 0.07% in Seoul, 0.08% in Incheon, and 0.02% in Gyeonggi. In the same order, sales prices fell by 0.05% in Seoul, 0.05% in Incheon, and 0.08% in Gyeonggi.

Professor Han Mun-do of Seoul Digital University’s Department of Real Estate said, "Delayed completions will partly influence rental prices, especially in areas with rental demand," adding, "However, since sales prices are expected to continue declining for the time being, the reduction in move-in volume will only serve to lessen the extent of sales price declines."