"Increase in Unsold Units Cuts Off Funding"…926 Construction Companies Closed in Q1

Over 10 Closures Daily on Average
60% of Closed Construction Companies Are in Provinces

"I don't know if we will be able to carry out even one project this year. It is difficult to secure real estate project financing (PF), and even if we do, the unsold inventory is too severe..."

An executive of a mid-sized construction company in the Gyeongnam region said, "We have to endure no matter what, but it is not easy."

The construction industry is struggling due to the real estate market slump and tightening liquidity. Especially, construction companies in provincial areas are facing mass closures as they cannot cope with the surge in unsold houses and soaring raw material prices.

According to the Construction Industry Knowledge Information System (KISCON) on the 15th, 926 general and specialized construction companies closed down in the first quarter of this year (excluding 19 withdrawals). This means more than 10 companies closed every day on average.

This is a 14.0% increase from 796 companies (excluding 13 withdrawals) in the same period last year and the highest number since 1,208 in 2014.

Closures were concentrated in provincial areas. In the first quarter, 118 construction companies based in Seoul reported closures, accounting for 12.7% of all closed construction companies. Those in the metropolitan area excluding Seoul accounted for 257 companies (211 in Gyeonggi, 46 in Incheon), or 27.7%, while the remaining 551 companies (59.5%) were located in provincial areas.

The main causes of the increase in construction company closures are liquidity tightening and rising raw material prices. The burden of loan interest increased due to the base interest rate hike, and combined with the real estate market slump, construction companies faced serious liquidity problems. Additionally, rising raw material prices and a shrinking sales market led to decreased profitability.

Large construction companies endured with their own cash reserves, but small and medium-sized construction companies could not hold on. Especially, since most small and medium-sized construction companies operate based in provincial areas, closures among provincial small and medium-sized construction companies inevitably increased.

Closures of provincial construction companies are expected to continue for the time being. So-called "malignant unsold inventory," referring to unsold houses after completion, is spreading mainly in provincial areas.

Most housing projects are carried out by developers obtaining PF loans from financial institutions with guarantees from construction companies. When unsold inventory occurs, funds are recovered, leading to bankruptcy not only for developers but also for contractors. The Bank of Korea estimates that 16.7% of provincial small and medium-sized construction companies are "zombie companies" that cannot even pay interest with their annual income.

According to the "February Housing Statistics" released by the Ministry of Land, Infrastructure and Transport, the nationwide unsold houses numbered 75,438 units, increasing by 0.1% (79 units) from the previous month, with the rate of increase slowing. However, unsold houses after completion rose by more than 13% in one month to 8,554 units, the highest since July 2021 (8,558 units). Notably, 7,071 units, accounting for 82.6% of the total, are in provincial areas.

Han Mundo, a professor in the Department of Finance and Real Estate at Yonsei University's Graduate School of Political Economy, said, "Small and medium-sized construction companies in provincial areas without spare funds do not have the stamina to withstand the current real estate market slump and interest rates. Especially in provincial areas where malignant unsold inventory is rapidly increasing, mass closures of construction companies are a concern."

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