Construction firms close their doors due to costly materials, weak demand

Construction firms continue to struggle due to a rise in raw material prices and weak demand in the property market. Real estate developers, both big and small, have been hit hard, with more than a hundred businesses shutting down this year alone.

The construction site of an apartment complex in Gangdong District, eastern Seoul [YONHAP]

Construction firms continue to struggle due to a rise in raw material prices and weak demand in the property market.

Real estate developers, both big and small, have been hit hard, with more than a hundred businesses shutting down this year alone.

Developers have been surviving on profit from the houses they sold during the real estate boom in 2021 since the market started to fall last year. But they are running out of budget as housing demand continues to stay low amid high interest rates.

The number of unsold houses increased a whopping 199 percent to 75,438 in February compared to a year before, according to the Ministry of Land, Infrastructure and Transport. Eighty-three percent of the total figure came from outside the capital area.

Experts anticipated the figure to exceed 100,000, but construction companies are postponing their sales for as long as possible, which led to the lower-than-expected figure.

“Business for housing construction shrunk to a quarter of what it originally was,” said a senior executive at one of the top 40 construction companies. “Nowadays, we try not to take on more projects and just stick it out. It’s all the same for the rest of the construction industry as well.”

The executive's company sold four apartment complexes in 2021, but sold only one last year. Its construction business suffered losses as well. In 2021, the company won a 15 billion (11.5 million) won contract to construct a building at Ajou University, but was left with a 3 billion-won loss.

“Due to a jump in the price of materials, we had to complete the project with a deficit,” the executive said.

Project financing was halted from the latter half of last year, sources said. Rising construction costs are also influencing the loss.

Some companies are not taking on new orders.

Orders received by construction companies from January to February amounted to 7.35 trillion won, which is a 33.6 percent decrease compared to the same period last year, according to the Construction Association of Korea.

Recently, the redevelopment cost of an apartment complex in Yeongdeungpo District in western Seoul rose 37 percent to 7.19 million won per 3.3 square meters, but not one construction company participated in the bidding.

The situation is worse for mid-sized construction companies. For many companies, land purchases and obtaining orders have completely halted.

“There’s a chance for construction companies to not receive full fees based on the sales rate for private construction,” said another executive from a large company. “We only take orders for a project that guarantees to pay the full cost, so naturally, we can’t take on any project nowadays.”

“We may be able to hold on by diversifying our business portfolio or by issuing corporate bonds, but small-and-mid-sized construction companies which focused on housing projects are on the precipice,” said Park Soo-heon, director of policy division at Korea Housing Association.

Sales of apartment complexes continue to be delayed. Nationwide figure of housings up for sale plummeted 64 percent to 35,000 for the first quarter this year compared to the same period last year, according to KB Securities.

Operating profit for 22 constructions companies listed on Kospi shrunk 22 percent last year compared to the year before.

KCC Engineering & Construction (E&C) saw a 1.1 billion-won loss last year, while operating profit for Taeyoung E&C and Kumho E&C were slashed by half last year compared to the year before.

The Bank of Korea presumes 16.7 percent of mid-sized construction companies outside of the capital area are marginal companies who can’t pay interest with their yearly profit.

A string of companies decided to close their doors due to lack of profit. Last year, Daewoo Shipbuilding and Marine Engineering, which ranked No. 83 on construction capability assessment, as well as Daechang Enterprise which ranked No. 109 and HN which ranked No. 133 applied for court receivership.

Wooseok Construction and Dongwon Construction Industries, each ranking No. 202 and 388, went bankrupt.

Reports of business termination have also jumped. A total of 135 companies applied to report their business closure this year, according to Ministry of Land, Infrastructure and Transport. That’s a 60.7 percent increase compared to last year during the same period the year before.

“Construction companies were able to hang on until now from projects that they’ve taken on two to three years ago, but the industry will worsen if new orders do not come in and houses are not sold,” said analyst Park Cheol-han of Construction & Economy Research Institute of Korea. “At this rate, small-and-mid-sized construction companies will continue to collapse like dominos.”

BY LEE JAE-LIM [lee.jaelim@joongang.co.kr]