The prolonged downturn in the construction market is deepening the woes of regional construction firms. While demand and investment are concentrated in key areas like Seoul, regions are struggling to clear their unsold inventory. The ongoing conflict between the U.S. and Iran has caused international oil prices to fluctuate again, raising concerns about increased construction costs.
According to the Ministry of Land, Infrastructure and Transport's Construction Industry Knowledge Information System (KISCON), there were 565 reported closures of construction businesses from January to August this year, a 29.3% increase from 437 during the same period last year. Of the 88 closures reported in August, 78 were from construction firms outside of Seoul, including Gyeonggi and Incheon.
The unsold inventory issue is a significant factor exacerbating the difficulties faced by regional construction companies. The Ministry reported that as of July, there were 48,758 unsold homes in the regions, a slight decrease of 0.4% from 49,961 homes during the same period last year.
In some areas, however, the number of unsold homes has surged. In South Chungcheong Province, unsold homes jumped from 4,289 to 9,982, a staggering increase of 132.7%. Other regions with notable increases include Busan (50.3%), Jeju (32.9%), and Daejeon (23.2%).
Most of the so-called 'chronic unsold homes' are concentrated in the regions. In July, out of a total of 29,152 unsold homes nationwide, 84.8% (24,708 homes) were located in the regions. If homes remain unsold after construction, the delay in recovering project costs can lead to increased financial burdens.
The financial struggles of these firms are evident in their performance metrics. Lee Ji-hye, a researcher at the Korea Construction Industry Institute, noted, "An analysis of the management performance of construction firms subject to external audits last year revealed that the operating profit margin for non-capital area construction firms was 2.7%, lower than the 3.9% for capital area firms. The proportion of firms unable to cover interest with operating profits was also higher in non-capital areas at 12.9%, compared to 9.8% in capital areas."
Even the metropolitan areas outside of Seoul are not immune to the unsold home issue. In Incheon, unsold homes rose to 4,071, a 134.4% increase from the same month last year, while Gyeonggi Province saw a 36.9% increase to 14,394 homes.
Amid a sluggish sales market, international oil prices are once again in flux. Rising oil prices can increase the costs of materials and transportation, further burdening construction firms. Past analyses by the Korea Construction Industry Institute estimate that a 10% increase in oil prices could lead to a 0.15% rise in domestic construction costs, although the actual impact may vary based on the duration of the price increase and how material costs are adjusted.
According to the Korea National Oil Corporation's Opinet, the price of Brent crude futures rose approximately 34% from $71.99 per barrel on July 6 to $96.28 on September 4. During the same period, Dubai crude increased from $64.1 to $101.91, a rise of about 59%.
Experts express concern that regional firms, which often lack capital and have a high dependence on local projects, are more vulnerable to external shocks compared to larger construction companies that have more financial flexibility and can diversify their operations. Kim In-man, head of the Kim In-man Real Estate Economic Research Institute, stated, "Unlike large construction firms that focus on key areas like Seoul, regional construction companies are unable to resolve their unsold inventory issues and are directly affected by external shocks such as loan regulations and rising oil prices."
Kim added, "Policies focused on key areas like Seoul could inadvertently exacerbate the difficulties faced by regions. Instead of applying the same standards, there should be a 'two-track strategy' that offers tax benefits for those purchasing or long-term leasing unsold homes in regions, as well as adjustments to zoning regulations for local redevelopment and reconstruction projects."
* This article has been translated by AI.
Copyright ⓒ Aju Press All rights reserved.