4 out of 10 Construction Companies 'Potentially Insolvent'... Red Light for Next Year's Wave of Bankruptcies
326 Comprehensive Construction Companies Closed from January to October This Year
Tied with 2006, the Year with the Most Closures
4 out of 10 Also at Risk
Warning signs of mass bankruptcies have been lit in the construction and housing industry. As the real estate market stagnates and financial tightening continues, small and medium-sized construction companies or regional construction firms with low financial strength are unable to endure. The number of general construction companies that have closed this year is expected to reach the highest level since statistics began.
In particular, concerns are growing that mass bankruptcies in the construction industry will intensify after next year, as survey results show that 4 out of 10 construction companies fall under the category of ‘potentially insolvent companies’ that have difficulty repaying debts normally.
According to the Ministry of Land, Infrastructure and Transport on the 29th, the number of general construction companies that closed from January to October this year was a total of 326 cases. This matches the number of closures in 2006 (326 cases) and is the highest since the government began compiling data on closed construction companies in 2005. With about two months remaining, there is a high possibility of setting a record for the highest number of closures ever.
Also, during the same period, the closure rate, which is the number of closed companies relative to the total number of general construction companies (19,277), was 1.7%, the highest in 10 years since 2013 (1.8%). Similarly, with about two months left, the closure rate could surpass that of 2013 depending on the situation.
Within the construction industry, voices expressing concern over mass bankruptcies of small and medium-sized construction companies are growing louder. The structure of the construction industry largely follows the order of client (developer) → main contractor (general construction company) → subcontractor (specialized construction company), with general construction companies acting as main contractors. An increase in closures of general construction companies, which are in the middle, means that closures of developers and specialized construction companies have also increased.
In fact, a survey showed that 4 out of 10 construction companies are classified as ‘potentially insolvent companies’ that have difficulty repaying debts normally.
According to the report “Analysis of Business Performance and Marginal Companies of Construction Companies Subject to External Audit” by the Korea Construction Policy Research Institute, potentially insolvent construction companies?those whose interest expenses exceed operating profits and thus have difficulty repaying debts normally?account for 41.6% of the entire construction industry (based on externally audited companies).
Construction companies increased investments and debts under the low-interest-rate environment during the COVID-19 period, but the rapid rise in benchmark interest rates last year led to a sharp increase in interest expenses, raising the overall risk of insolvency. The continuous rise in construction material prices due to the Russia-Ukraine war also negatively impacted profitability.
Kim Tae-jun, a research fellow at the Korea Construction Policy Research Institute, said, “Due to the high-interest-rate environment and rising construction costs, insolvency in the construction industry is expected to worsen this year. If the construction market does not rebound, overall insolvency among construction companies will intensify after next year, so countermeasures are necessary.”
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He added, “It is necessary to realize liquidity supply to the construction industry to prevent the suspension of already significantly progressed projects and to conduct proactive restructuring of insolvent companies.”
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