One of South Korea’s top 10 construction companies, Company A, has decided internally to avoid pursuing large-scale projects this year. Instead, they will prioritize smaller projects with secured stability or ongoing construction ventures. A company official explained, “Given the uncertainty surrounding interest rates and the domestic economy, our goal for this year is to manage with the minimum number of projects necessary to sustain the company.”
The business activities of domestic construction companies are sharply declining. In January, new construction orders in South Korea totaled 8.5639 trillion won, down 53.6% from the same period last year (18.4721 trillion won). This decline is the largest in over 13 years since October 2010(58.9%). Annual construction orders for the previous year also fell by 18.5% compared to the year before, totaling 176.1387 trillion won. Excluding the IMF foreign exchange crisis period in 1998 (-42.6%), this marks the largest decline in construction orders since records began in 1977.
The current downturn in South Korea’s construction sector is likely to continue in the near term. This trend follows the recent turmoil in real estate project financing (PF) that unfolded at the end of last year, prompting financial institutions to tighten their lending to construction companies. Experts note that the construction industry’s ripple effects extend beyond employment, impacting consumer sectors like household goods and electronics. They stress the importance of addressing both the PF crisis and implementing strategies to prevent a broader slump in the construction industry.
Construction companies, reeling from a steep real estate market downturn since the second half of 2022, have largely shifted gears to emergency management mode this year. Major players like Samsung C&T, Hyundai E& C, DL E&C, GS E&C, and Daewoo E&C, all listed on the stock market, have trimmed their order targets for this year by 8% compared to last year’s performance. Even mid-sized players such as Company B, ranked within the top 20, have strategized their orders around secure public housing projects for the year. Company C, known for its higher-than-average debt ratio, has opted to halt operations to attract new orders in the first half of this year, focusing instead on boosting contract rates for existing unsold properties.
Construction companies succumbing to management woes and entering court-administered rehabilitation procedures are also on the rise. This year, seven companies, including New Millennium Construction and Sunwon Construction, have sought rehabilitation, with five already declared bankrupt. This surge, compared to just two bankruptcies during last year’s real estate downturn in January-February, signals potentially more challenging times ahead for the construction sector.
Park Cheol-han, a research fellow at the Construction & Economy Research Institute of Korea (CERIK), explained, “Companies are finding it difficult to turn a profit in the current environment, considering factors such as the real estate market, interest rates, and construction costs.” He further noted, “Despite the government’s announcement of various measures to ease real estate regulations at the beginning of the year, the lack of finalization in legal amendments or administrative procedures is hindering their effectiveness.”
Joo Won, deputy director of the Economic Research Department at Hyundai Research Institute, emphasized, “The construction industry, known for its high wages, has a substantial effect on boosting purchasing power and stimulating the economy when job opportunities increase. This particularly benefits low-income households.” He added, “It’s crucial to prevent further decline in the construction sector to support domestic consumption-driven economic recovery.”
