Reluctant to Lend, No Orders... Construction Companies Facing 'Drying Up of Funds'

When crossing the Banpo Bridge in Seoul, you can see new apartments, old apartments, and apartments under construction all at once in the Sinbanpo area. The new apartments on the left are Acro Riverview Sinbanpo, the low old apartments on the right are Sinbanpo 2nd Complex, and the apartments under construction in the back are the Maple Xi new construction site. Photo by Huh Younghan younghan@

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Domestic construction companies are running out of funds. Until 2022, the growth rate of construction industry loans had risen by nearly 30%, but it sharply dropped to the 0% range in the third quarter of last year. As the construction industry entered a recession and workloads decreased, the demand for loans from construction companies declined. Additionally, concerns over the financial soundness of construction firms led banks to become reluctant to extend loans.

According to the Bank of Korea's Economic Statistics System on the 27th, the outstanding balance of working capital loans for the construction industry reached approximately 63.8 trillion KRW as of the third quarter. It has remained around the 60 trillion KRW level since the second quarter of last year. While the balance itself has not changed significantly, the upward trend has noticeably flattened. The year-on-year growth rate of loan balances peaked at 23.6% in the fourth quarter of 2022 but has since plummeted. After the Legoland incident and the emergence of real estate PF (Project Financing) issues that year, the rate began to fall, and amid the worsening real estate market and high interest rates, it plunged to 0.6% in the third quarter of this year.

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Working capital refers to construction costs such as wages and raw material expenses invested at construction sites and serves as an indicator of the construction industry's health. Construction companies need to secure construction costs before making profits from sales, primarily through bank loans. When the construction market deteriorates and orders decrease, loan amounts also decline. Banks raise interest rates or reduce credit limits to minimize repayment risks, effectively locking down loans to construction companies. Construction firms also have fewer new projects requiring funding, reducing their need to approach banks. Consequently, the outstanding loan balance for the construction industry decreased by 720 billion KRW in the third quarter compared to about 64.52 trillion KRW in the second quarter, marking a retreat.

An official from a major construction company explained, "Most sites ready for groundbreaking have already started construction and received the necessary loans, while projects nearing completion are increasing. Since there are no new projects starting, the overall loan balance is decreasing." Another official from a large construction firm said, "After the Taeyoung Construction incident earlier this year, banks raised PF interest rates, making loans more difficult to obtain. During a recession like now, even large construction companies face PF interest rates of 7-8%, which makes it impossible to generate profits, so they hesitate to start new projects."

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From January to October this year, domestic construction orders (155.282 trillion KRW) slightly worsened compared to the same period last year (155.411 trillion KRW). Considering the downturn in the construction market, the government increased public orders (40.4704 trillion KRW → 44.4852 trillion KRW) by 4.0148 trillion KRW compared to last year. However, private orders (114.9406 trillion KRW → 110.7968 trillion KRW) decreased by 4.1438 trillion KRW, causing the total order amount to decline.

Yu Wiseong, a research fellow at the Korea Construction Industry Research Institute, said, "This year, especially, apartment supply shortages, tightened loan regulations, and interest rate fluctuations negatively impacted the construction market. Looking at the Construction Business Survey Index, the construction market is expected to worsen for the time being."

Private orders are expected to decline further next year. According to a full survey by Real Estate R114 of the next year's pre-sale volumes of 25 major construction companies, a total of 146,130 households (based on private apartment pre-sales, including rentals) are scheduled for sale across 158 projects nationwide. This figure is 26,000 households lower than 2010 (172,670 households), which had the lowest pre-sale volume since 2000. The market shock from the apartment supply cliff is expected to delay the recovery of major construction companies' performance.

An industry insider said, "A decrease in pre-sales means fewer orders, and no projects to start means no investments for the next 2-3 years. The existing order backlog of construction companies has also significantly decreased, and with uncertain future orders, the construction industry's hardship is expected to continue next year."

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