Low-Profit Small-Scale Reconstruction Projects: Finding a Builder Is Like Reaching for the Stars

Switching to Private Contracts After Failed Bids by Construction Companies
Some Associations Move Toward Dissolution
High Construction Costs Make Profitability Elusive
Limited Sales Revenue Increases Burden on Association Members

Despite the fast pace of project execution, small-scale reconstruction projects targeting complexes with fewer than 200 households are being overlooked in the market. The small size of these complexes leads to higher construction costs per 3.3 square meters (one pyeong), and limited demand for new units is another obstacle. As it is difficult to recoup construction costs, construction companies are also reluctant to participate. Although the Seoul Metropolitan Government has attempted to improve project profitability by increasing the floor area ratio, industry response remains lukewarm.

According to the maintenance industry on December 11, Geukdong Riverside Apartment in Dongjak-gu, Seoul, held its second on-site briefing session for construction company selection on November 27. Although Hyosung Heavy Industries, HJ Heavy Industries, and Jinheung Construction attended the session in October, none of them actually bid for the project. The association will close the bidding on December 18. This project involves constructing 148 apartment units in buildings ranging from three basement levels to 24 above-ground floors in the Bon-dong area of Dongjak-gu.

Reconstruction site in downtown Seoul. Photo by Yonhap News

Pungjeon Apartment on Wonhyo-ro in Yongsan is currently undergoing the process of dissolving its small-scale reconstruction association. This complex is located within a six-minute walk of the Yongsan International Business District, allowing residents to also enjoy the Yeouido living area. The association had planned to pursue reconstruction for 140 households, leveraging the attractive location. However, after two failed construction company tenders in 2023, the project has effectively been halted.

The small-scale reconstruction association for Jeongneung Sky Townhouse in Seongbuk-gu is also struggling to select a construction company for similar reasons. The association held two on-site briefings between July and October, but no construction companies participated. In October, the association switched to a private contract method for selecting a builder.

Small-scale reconstruction projects target small apartment complexes and townhouse complexes with a project area of less than 10,000 square meters and fewer than 200 existing households. Unlike standard redevelopment or reconstruction projects, these are not subject to the "Urban and Residential Environment Improvement Act." This means the safety inspection and designation of maintenance zones can be omitted. As a result, it is possible to launch the project as soon as two to three years after establishing the association.

However, low profitability makes these projects inherently challenging. Even at large-scale sites in Seoul, where economies of scale can be leveraged, construction costs are approaching 10 million won per 3.3 square meters. For small-scale complexes, however, economies of scale do not apply as they do for larger projects. A construction industry official explained, "When constructing large complexes, we can purchase raw materials in bulk and lower prices, but for small complexes, we have to place small orders and pay higher prices. Typically, labor and material costs are about 5% higher than for general redevelopment or reconstruction projects."

Due to the low success rate of unit sales, construction companies are avoiding small-scale complexes. Recently, in the maintenance industry, it has become common practice to pay construction costs only after all units have been sold in projects with attractive locations-a contract method known as "bunyangbul." However, if a construction company undertakes a small-scale project with less demand than a large complex and fails to sell all units, it may not receive payment for construction. Another construction industry official noted, "In most prime locations in Seoul, contracts are made using the bunyangbul method. Construction companies are taking a conservative approach, only bidding on projects expected to sell out completely, which has reduced their interest in securing small-scale reconstruction projects."

Taking these issues into account, the Seoul Metropolitan Government has launched extensive deregulation measures to improve project profitability. Since May, the floor area ratio for small buildings in Type 2 and Type 3 general residential zones has been temporarily relaxed for three years to the legal maximum of 250% and 300%, respectively. For Type 3 general residential zones with a building coverage ratio of 50%, applying a 300% floor area ratio allows for two to three additional floors compared to the existing four to five stories.

However, the industry's response remains negative. An official from a small-scale reconstruction association in Seoul stated, "Because of the small size of these complexes, it is difficult to offset rising construction costs with general sales revenue. We believe the floor area ratio needs to exceed at least 400% for the project to be viable, so we are seeking to upgrade the zoning to quasi-residential." Kim Jekyung, head of Tumi Real Estate Consulting, explained, "The profitability of a maintenance project depends on how many units can be sold to the general public. Except for prime locations in Seoul where high sale prices are possible, small-scale reconstruction projects are unlikely to attract much attention."

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