South Korean Construction Industry Faces Unprecedented Challenges Amid Economic Downturn

South Korea's construction industry is experiencing stark polarization amidst a real estate market downturn and rising Project Financing (PF) interest rates. Large-scale construction companies like Hyundai Construction, Daewoo Construction, DL E&C, and POSCO E&C have responded to these economic conditions by expanding overseas orders and transitioning to digital platforms. In stark contrast, many medium and small-sized construction firms are teetering on the brink of bankruptcy.

According to a report on the construction market trend released by the Korea Construction Industry Research Institute on the 13th of this month, 454 comprehensive construction companies have either declared bankruptcy or shut down over the 13 months from May 2022 to May 2023. This sharp increase in bankruptcies and closures is attributed primarily to a surge in unsold houses since September of last year.

Indeed, data from the Ministry of Land, Infrastructure, and Transport reveal that the number of unsold houses grew from 32,722 units in August of last year to 71,365 units in April this year, a startling increase of 118.1%. From September of last year to January this year, the number of unsold houses surged by over 10% each month, relative to the previous month.

This industry-wide stress has not spared medium-sized construction companies, even those ranked within the top 100 in terms of construction capability. For instance, Shinil Construction, known for its 'Shinil Happy Tree' apartment brand and ranked 113th, applied for court management last month after only six of the 93 units in its 'Ulsan Onyang Valley Shinil Happy Tree' project were sold, leading to a halt in construction due to unpaid construction material costs.

Other cases include Daechang Enterprise, ranked 109th in the 2022 construction capability evaluation, which entered rehabilitation procedures last month as the amount of unclaimed construction costs skyrocketed last year, leading to an increased debt ratio.

Complicating matters is the delay in completion payments by the Korea Land and Housing Corporation (LH), a critical lifeline for these construction companies. Despite executing projects to completion, often at a loss, these construction companies find themselves in precarious financial positions due to delayed payments.

The impact of LH's delayed payments extends beyond financial strain. Construction firms have suffered significant losses in their year-end financial statements as a result of inputting construction costs without receiving due payments, leading to loss accounting. This ripple effect extends to subcontractors, who have also suffered due to the financial strain on comprehensive construction companies.

Furthermore, the delay in completion payments has also led to reporting losses as receipt of completion payments is a prerequisite for performance recognition. As a result, there are concerns about downward adjustments in construction capability assessment scores and ratings announced this year.

With no apparent relief in sight, this crisis illuminates the urgent need for innovative strategies and supportive policies to prevent further polarization in the construction industry and bolster the struggling medium and small-sized construction firms.

The government and industry stakeholders need to address these issues promptly and effectively, taking into consideration the health of the entire construction ecosystem and its significant role in the South Korean economy. The survival of these firms, and indeed the health of the industry at large, may depend on it.