[Donmaekgyeonghwa] Construction Industry, Growing Warning Signals on Liquidity Management

The Bank of Korea raised the base interest rate by 0.5 percentage points, and the real estate transaction market is expected to experience a prolonged winter. On the 13th, a red light was on at a traffic signal near an apartment in downtown Seoul.

Following the real estate market downturn caused by interest rate hikes, the investment sentiment has been further hit by the Gangwon-do Legoland PF (Project Financing) crisis, triggering red flags on the liquidity status within the construction industry. After the bankruptcy of local small and medium-sized construction companies, ominous rumors surrounding large construction firms have spread, amplifying warning signals across the entire construction sector.

On the 21st, Lotte Construction announced that it had signed a loan agreement worth 500 billion KRW for operating fund procurement. At the board meeting held the previous day, Lotte Construction resolved to borrow 500 billion KRW from Lotte Chemical for three months until January 18 next year. This contract is an extension of the 200 billion KRW rights offering conducted on the 18th.

However, Lotte Construction’s efforts to improve its financial structure seem to be fueling the widespread ‘rumors’ in the industry. There is a circulating rumor in the construction sector that “due to interest rate hikes, the real estate market slump will prolong, and construction companies will face bankruptcy risks as they fail to meet PF maturities.” The rights offering by Lotte Construction, a top 10 construction company by construction capability, is being interpreted as a sign of the widespread liquidity crunch in the industry.

The bankruptcy rumors have gained traction as mid-sized construction company Woosuk Construction in the Chungnam region was processed for a first-stage bankruptcy at the end of last month after failing to settle promissory notes. There are also talks that several mid-sized construction companies in the metropolitan area may soon default as they fail to meet promissory note maturities due within this year. Concerns are rising that the Dunchon Jugong Apartment (Dunchon Olympic Park Avenue Foret), which requires 700 billion KRW in project funding, could be adversely affected by the tightening capital market. Although previously procured project funds are nearing maturity, refinancing is reportedly facing some difficulties due to increased financial market volatility.

However, a representative from Company A stated, “While it is true that the real estate PF market has contracted, the market’s concerns are exaggerated and distorted to a serious degree.” Lotte Construction emphasized that this rights offering is a “preemptive measure to stabilize the financial structure amid rising raw material prices and concerns over the real estate market downturn.”

Meanwhile, the low interest rates and the resulting massive liquidity in the market that have persisted over recent years have been key factors supporting the construction industry until recently. PF is a financial technique that raises funds based on the expected sales revenue of a project rather than the borrower’s creditworthiness or collateral. Based on optimistic real estate market forecasts, massive funds could be easily mobilized to rapidly advance projects, which in turn drove the housing market boom.

In 2020, the total construction contract amount reached a record high of 194.1 trillion KRW, nearly double the 103.2 trillion KRW recorded in 2010. In a favorable funding environment, the contract amount in 2021 increased by 9.2% year-on-year to 212 trillion KRW, marking three consecutive years of growth.

This content was produced with the assistance of AI translation services.