No. of construction companies closing businesses doubles amid weak market

[Photo by Lee Seung-hwan]

Lee Seok-hee, Shin Chan-ok and Chang Iou-chung

The number of construction companies that went out of business this year has nearly doubled from a year ago, reaching its highest level since 2006, amid the sluggish property market.

According to data from the Ministry of Land, Infrastructure, and Transport, 405 comprehensive construction companies filed for bankruptcy this year as of Sunday. The figure shows that 1.5 companies closed their businesses on a daily average.

It is the highest figure since 2006 when 435 companies reported closures during the same period, and it is about twice as high as 211 companies that reported closures last year.

Some of the top 100 companies by construction capability, including DW Development Co. and DSME Construction Co. are under court receivership.

The closures come amid the sluggish housing market.

According to local real estate data tracker R114, new housing supplies totaled 135,181 units in the first 9 months of this year, which is down about half compared to those during the same period last year.

In August, there was no housing supply in nine out of 17 cities and provinces in Korea, including Incheon, Busan, and Ulsan.

The market crunch in the real estate project financing (PF) market adds further pressure to the already distressed construction companies.

Companies are struggling to obtain new loans and refinance existing loans as their profitability deteriorates due to the housing market slump.

The Korean government is expected to focus its housing finance measures on providing funds to alleviate financial strains.

Measures include providing liquidity to the distressed companies and offering PF funds to ongoing construction projects.

Korea Asset Management Corp. (KAMCO) is expected to create a 1 trillion won ($748.7 million) fund with five major financial institutions aimed at PF normalization.

KAMCO will invest 100 billion won each in five asset management firms — Shinhan Asset Management Co., KB Asset Management, IGIS Asset Management Co., Capstone Asset Management Co., and Koramco Asset Management Co.— and each firm is expected to raise an additional 100 billion won or more from private sources.

KB and Shinhan financial groups have confirmed their participation at an earlier stage, and Woori Bank, which established its own 500 billion won fund in May, is also expected to announce an additional investment of 110 billion won.

Hana Bank and NH Bank are also expected to announce their investments soon, according to industry sources.

The capital industry also seeks industry-wide measures as they witness an increase in PF loan delinquency rates to an average of 4 percent.

While investing their own funds to manage poor loans, they also plan to establish a PF normalization support fund worth several hundred billion won by attracting financial investors from the private sector.

The Credit Finance Association is expected to unveil details of a new fund this week.