"Even a 5% Deposit Is Difficult"... Shinsegae Construction's Unsold Units Challenge [Real Estate AtoZ]

Billive Myeongji Seeks Way to Reduce Deposit from 10% to 5%
Samsung C&T and Hyundai Construction Lower Deposit to Achieve Full Sales
Financial Soundness 'Red Light' Due to Consecutive Unsold Units Impact

Shinsegae Construction has attempted to ease contract deposit conditions to resolve unsold inventory in provincial areas, but it has yet to find a way forward amid the cold reception from the financial sector. Lowering the contract deposit from 10% to 5% is generally seen as a typical solution to unsold units, but the financial sector, which should support this, is rejecting it on the grounds that it involves "mid-sized construction companies' non-metropolitan sales volumes amid an economic downturn."

According to a comprehensive report by Asia Economy on the 2nd, Shinsegae Construction recently began discussions with financial institutions such as savings banks regarding lowering the contract deposit for the apartel 'Villiv Myeongji Duclass' in Myeongji District, Gangseo-gu, Busan, from 10% to 5% of the sale price. Even if the contract deposit is set at around 5%, they are still looking for financial institutions willing to provide interim payment loans to the contract holders.

According to the Housing Supply Regulations, the contract deposit can be set by the project implementer within 10-20% of the house price, and the interim payment can be up to 60%. Typically, the payment is divided into 10% contract deposit, 60% interim payment, and 30% balance payment.

Will lowering the contract deposit secure sales performance?

Shinsegae Construction's move to reduce the contract deposit ratio aims to lessen the initial financial burden on buyers and promote sales. According to Korea Credit Rating, as of the end of January, the sales rate of residential units excluding commercial spaces in Villiv Myeongji Duclass, which began sales in February 2022, was only 49%. The construction industry generally considers that a sales rate must exceed 70% to recover construction costs.

A Shinsegae Construction official said, "We are in the early stages of gauging the market atmosphere to see if there are financial institutions offering better conditions, and we are in close discussions with several financial companies. Lowering the contract deposit to 5% is one of several methods we are exploring by benchmarking other construction companies' cases."

The Samsung C&T consortium (Samsung C&T, SK Ecoplant, Kolon Global) revised contract conditions in March by lowering the contract deposit ratio from 10% to 5% for 'Maegyo Station Pallucid' in Seryu-dong, Gwonseon-gu, Suwon, Gyeonggi Province. Although initial contract results were poor due to high prices, all unsold units were sold within about a month after changing the contract terms. Hyundai Construction also set the contract deposit at 5% of the sale price for 'Hillstate The Unjeong' in Unjeong New Town, Paju, Gyeonggi Province, and sold out all units by April.

Unlike these complexes, Villiv Myeongji Duclass is considered relatively disadvantaged in adjusting the contract deposit. This is due to the financial sector's lower preference for mid-sized construction companies' non-metropolitan projects. A savings bank industry insider said, "The more contract deposit a buyer pays, the less likely they are to default on interim payment loans, so financial institutions naturally prefer places with a 10% deposit over those with 5%. However, judgments can vary depending on the size of the construction company, project location, and sales rate."

A savings bank official operating mainly in Busan and Gyeongnam said, "Our bank has a credit screening guideline that loans are only given to contract holders who pay 10% of the sale price as a contract deposit. For buyers who only pay 5%, there are genuine concerns about risks such as the borrower's credit issues and inability to cover financial costs."

Need to lower contract deposit to secure sales performance

Meanwhile, Shinsegae Construction is also showing poor sales performance at projects in Daegu and Seoul. In particular, 'Villiv Lucent' in Chilseong-dong, Daegu, and 'Villiv Radice' in Bondong, Daegu, recorded sales rates of 24% and 31%, respectively, as of the end of January. The sales rate for the Yeonsinnae complex development project in Seoul is around 41%, and the company gave up the construction rights for the KT site development project in Mok-dong, Seoul, earlier this year.

The ongoing unsold inventory has triggered red flags for Shinsegae Construction's financial soundness. Accounts receivable, which were 6.2 billion KRW in 2022, more than doubled to 13.7 billion KRW last year and reached 16.5 billion KRW in the first quarter of this year. Accounts receivable refer to payments not received from clients despite completing construction or proceeding with sales. The longer the payment delay, the more it negatively affects cash flow.

The parent company, E-Mart, has stepped in as a savior to resolve Shinsegae Construction's liquidity crisis, but there are analyses that this may only be a temporary fix. In May, E-Mart supported Shinsegae Construction by issuing 650 billion KRW worth of hybrid capital securities. This large-scale financial support lowered the debt ratio, which had exceeded 800%, to below 200%. However, industry consensus holds that for Shinsegae Construction to normalize, profitability improvements such as better sales performance must be achieved rather than just capital injection.