With several construction firms going bankrupt last year, marking the highest in 17 years, the South Korean government is intensifying its efforts to mitigate risks associated with real estate project financing (PF). Now that the immediate financial crisis has been addressed, the focus is shifting towards the employment crisis stemming from the downfall of construction companies.
The construction industry is facing severe challenges as the real estate market stalls. The local real estate sector crisis is worsening, with concerns escalating about the risk in local commercial real estate.
The Ministry of Land, Infrastructure, and Transport (MOLIT) reported on Feb. 14 that 1,948 construction companies closed down last year, the most since 2006. These closures are largely due to the PF market’s contraction, sparked by the Legoland crisis and soaring construction costs.
The so-called ‘Legoland crisis’ began in September 2022 when Gangwon Province took steps to recover the Gangwon Jungdo-development Corporation (GJC), the developer of the Legoland theme park. This move precipitated a bond market crisis when Dongbu Corporation, the project’s construction firm, went unpaid.
The government has implemented various measures to prevent the fallout from the instability in the project financing sector from affecting the broader financial markets. This is crucial as the collapse of numerous construction firms could threaten the stability of financial institutions that have extended credit to them.
The downturn in the real estate market is exacerbating the PF crisis. MOLIT data shows that as of December last year, the inventory of unsold homes reached 62,489 units, marking the first rise in 10 months. The issue of unsold homes post-completion, considered malignant unsold homes, is intensifying.
The construction sector’s outlook is bleaker this year than last, further fuelling the PF crisis. With a decrease in construction orders last year, investment in construction is predicted to drop. The Bank of Korea anticipates a 1.8% decline in construction investment this year, a significant downturn from the previous year’s 2.7% growth forecast.
The government is actively working to prevent financial instability linked to the PF crisis. It has established measures such as the PF loan refinancing guarantee, which allows for the refinancing of loans at lower interest rates. It has broadened the scope of performance guarantees and non-housing PF guarantees for financial obligations. A market stabilization program worth $63.5 billion (85 trillion won) is set to be launched to support the real estate PF market.
