The prolonged slump in South Korea’s regional real estate markets has triggered a wave of bankruptcies among small and medium-sized construction firms. Even major mid-sized builders are reporting consecutive operating losses for the third quarter.
Unlike large builders diversifying their portfolios by expanding overseas or venturing into new projects, mid-sized firms heavily dependent on the domestic housing market are seeing their profitability plummet as the housing market downturn drags on.
Kolon Global, Kumho E&C, Dongbu Corp, and Shinsegae E&C recorded consolidated operating losses in the third quarter, according to their earnings reports on Nov. 28.
Shinsegae E&C posted a loss of 54 billion won ($39 million), marking its eighth consecutive quarter in the red. Kolon Global’s losses amounted to 21.1 billion won, continuing its streak of two straight quarters of losses. Kumho E&C and Dongbu E&C also turned to losses in the third quarter, reporting deficits of 157.4 billion won and 21.9 billion won, respectively.
Mid-sized builders, which primarily focus on housing and engineering projects in Korea and lack significant overseas operations, are disproportionately affected by the slump in the domestic housing market compared to their larger counterparts. The accumulation of unsold post-construction housing units compounds the challenges. As of the end of September, 83.3% (14,375 units) of unsold post-construction homes were concentrated in regional areas.
Skyrocketing construction costs have further squeezed profitability, with project delays caused by the sluggish housing market driving up cost-to-revenue ratios. In the third quarter, Kumho E&C’s cost-to-revenue ratio surged to 132.9%, while Shinsegae E&C jumped to 107.7%. Dongbu E&C and Kolon Global also reported ratios of 98.0% and 96.9%, respectively, nearing the break-even point of 100%.
Meanwhile, 26 construction companies have defaulted this year, surpassing last year’s 23. Most recently, Busan-based builder Shintaiyang Construction declared bankruptcy after failing to settle project financing (PF) notes worth over 23 billion won. Founded in 1995, the builder gained recognition for its role in constructing the Nurimaru APEC House in Haeundae-gu, Busan.
“Due to the real estate market polarization, unsold homes in regional areas will continue to pile up, and recovering the additional construction costs will remain a challenge,” said an official from a mid-sized construction firm. “Performance will continue to be sluggish through next year.”