South Korea’s construction sector, which accounts for roughly 15% of the country’s GDP and has long been considered a key barometer of the economy due to its job creation and spill-over effects across related industries, is facing a severe downturn. The struggles of mid-sized and small construction firms, considered the industry’s backbone, are sending shockwaves through the sector, impacting both subcontractors and major builders.
Concerns are growing that the financial strain could spill over into the financial sector, straining real estate trust companies, banks, and securities companies that have provided loans or guarantees to cash-strapped builders.
As builders cut back on hiring, the construction sector shed nearly 170,000 jobs in January compared to a year ago, including over 60,000 jobs for new hires. The job cuts are expected to weigh on an already sluggish economy, further hindering recovery.
At the heart of the crisis is a surge in corporate rehabilitation filings by mid-sized construction firms. In Korea, corporate rehabilitation is similar to Chapter 11 bankruptcy in the U.S.
So far, six mid-sized builders have filed for corporate rehabilitation this year, according to the construction industry on Mar. 9. The companies include Shindonga Construction, Sambu Construction, Daezer Construction, Samjung Enterprise, Ankang, and Byucksan Engineering. High interest rates, soaring construction costs since late 2022, a contraction in the real estate project financing (PF) market, and a slowdown in the housing sector outside the Seoul Metropolitan Area have pushed these builders to the brink.
Last year, the total amount of unpaid construction fees owed to mid-sized firms reached nearly 12 trillion won ($8.3 billion), up 40% from two years ago. Many of these firms have stayed afloat by taking on debt to cover construction expenses, but with the prolonged real estate slump, their options are dwindling. Experts warn that without drastic measures, more companies may be forced into corporate rehabilitation or bankruptcy.
While corporate rehabilitation filings had previously been rising among smaller regional builders, the liquidity crisis is now spreading to mid-sized companies with solid market positions in the metropolitan area. Many industry insiders fear the sector could be hit with a wave of insolvencies. With construction investment decreasing, costs remaining high, and unsold housing inventory piling up, mid-sized builders are struggling under the weight of growing unpaid construction fees.
As of last September, 37 mid-sized builders had a combined 11.72 trillion won in outstanding payments and unbilled construction costs, according to financial reports updated on the Financial Supervisory Service. This marks a 26.1% increase from the end of 2023 (9.29 trillion won) and a 39.2% surge from the end of 2022 (8.42 trillion won). Outstanding payments refer to payments yet to be collected for completed work, while unbilled construction costs represent expenses that have been incurred but not yet invoiced—often due to unexpected cost increases in materials and labor.
Builders can eventually recover these outstanding payments during a real estate market surge. But in a market downturn marked by weak home sales and rising construction costs, these receivables are more likely to turn into bad debts. Mid-sized firms focusing on regional projects are particularly vulnerable to financial distress as unpaid construction fees accumulate.
A prime example is Shindonga Construction, a construction firm in Korea that recently filed for corporate rehabilitation. The company’s uncollected receivables nearly tripled over three years, from 71.9 billion won in 2020 to 214.6 billion won in 2023. The builder’s financial troubles stem from large-scale unsold housing projects in Jinju’s Shinjinju Station and Uijeongbu. Despite posting 18.1 billion in operating profit last year, the firm ultimately collapsed under financial strain.
