[Urgent Check] "Is the Second Taeyoung Construction Emerging?"... Construction Companies' Profitability Plummets

'EBITDA Margin' Profitability Indicator Declines
Difficulty in Pricing Units and Bad Debts Due to Unsold Units After Completion
Possibility of PF Contingent Liabilities Materializing Amid Financial Sector Distancing

This year, the profit-generating ability of major domestic construction companies is expected to decline significantly. Despite increasing the amount of funds raised through project financing (PF) last year when housing supply volumes decreased, the financial burden has grown due to construction delays and postponements of new projects. Pessimistic forecasts even predict a "second Taeyoung Construction incident after April."

Improvement in Construction Companies' Profitability Expected to Be Difficult

Korea Ratings announced on the 5th that the EBITDA margin of 25 major domestic construction companies is expected to remain at around 4.1% this year. EBITDA is an indicator of a company's cash-generating ability through its operating activities. It refers to operating profit before accounting for factors that obscure the company's fundamental management performance (such as corporate tax, interest expenses, and depreciation). The EBITDA margin is the ratio of EBITDA to sales revenue. A low figure indicates weak sales growth potential for construction companies.

The EBITDA margin averaged 7.2% annually during the real estate boom from 2019 to 2021. However, it dropped sharply to 5.1% in 2022 when the real estate market began to contract rapidly, and further declined to 3.9% last year. Under these circumstances, the forecast is that this year will see a similar level to last year.

Kim Hyun, a senior researcher at Korea Ratings, said, "Due to the economic downturn and high interest rates, real purchasing power has decreased, making aggressive pricing difficult. The increase in 'unsold units after completion' raises the possibility of bad debts for construction companies, so improving profitability will not be easy." He added, "The financial sector's reduction of exposure related to PF could materialize PF contingent liability risks, leading to increased financial burdens for construction companies."

Differences from the 2008 PF Crisis

KB Financial Group Management Research Institute also pointed out the ongoing possibility of a PF crisis in its '2024 KB Real Estate Report.' Notably, the report highlighted that the real estate PF risks during the 2008 global financial crisis and the current PF risks are unfolding differently.

The biggest difference cited is that the current crisis has occurred while unsold apartments have decreased. Last year, the number of unsold apartments nationwide dropped by 6,000 units compared to the previous year. This decrease is because projects became difficult to proceed from the start, resulting in fewer units being built and thus fewer unsold units. During the financial crisis, despite the real estate market downturn, developers and construction companies aggressively pushed sales to avoid the application of the price ceiling system, leading to oversupply of medium and large-sized units. This worsened the financial health of construction companies and triggered PF defaults after 2010.

The report analyzed, "Although the current decrease in unsold apartments is a positive factor, the fact that projects are not progressing smoothly suggests a high possibility of future problems." It added, "If projects are delayed in a high-interest-rate environment, the financial burden on construction companies will continue to grow." Furthermore, it stated, "The recent sharp decline in housing supply is not simply due to the economic downturn but also because even relatively viable projects are not progressing due to increased project costs, which is concerning." The report emphasized, "In such cases, PF market risks could escalate rapidly, so the government needs to continuously send supply signals to the market and quickly assess and respond to both sound and distressed projects."

Why PF Fundraising Amounts Are High Despite Reduced Housing Supply

Recently, despite the decrease in housing supply by construction companies, the increased amount of PF fundraising could become the epicenter of the crisis. According to the Financial Supervisory Service, the issuance amount of PF-related securitized bonds (PF-ABCP and PF-APSTB) reached 18.3581 trillion KRW last year. The average annual issuance amount over the three years from 2021 to last year was 18.2499 trillion KRW, more than double the average issuance amount of 7.9577 trillion KRW during the previous three years (2018?2020).

A financial sector official explained, "Simply put, both developers and contractors can only repay loans after completing the building and receiving the final sales proceeds. However, with rising construction costs and a sluggish sales market, construction companies are unable to complete projects, so they extend maturities or issue additional securitized bonds to hold on, causing the volume to accumulate."

An official from a mid-sized construction company said, "There is widespread speculation that a 'second Taeyoung Construction incident' will occur after the April 10 general election." He added, "While construction companies with financial structures on the brink may collapse during this downturn, even those without management issues are suffering collectively." He continued, "The construction industry hopes that a quick sorting of viable projects will take place so that projects with business potential can proceed without disruption."