Korea’s Construction Companies Going under En Masse

Dongdo, the company that completed apartment complexes called “Miso Dream,” faced bankruptcy yesterday. Due to a slowdown of the housing sector leading to a growing number of apartment units not being sold, Sechang, Samik, Shinil, Sejong Construction, and three more construction companies went out of business recently.

Financial organizations and the construction sector found that Dongdo, a Jeolla Province-based construction company, failed to pay back 5.1 billion won worth of treasury notes and went under on September 11.

Dongdo ranks 195th this year in the construction ministry’s Comprehensive Construction Capability rankings and has been building 1,800 apartments in Naun-dong, Susong-dong in Gunsan, Namwon City, North Jeolla Province, and Seocheon in South Chungcheong Province, and has been also involved in building the highway connecting Jeonju and Gwangyang.

The company has been suffering from financial difficulties ever since the sale of its shopping mall in Geumam-dong, Jeonju, which was completed in 2005, and of its apartment units under construction has been slow.

Since its foundation in 2003, Dongdo has been generating 50 to 70 billion in sales and 3 to 4 billion won in net profit annually; however, net income took a dramatic nose dive and was only 1.3 billion won last year.

The construction sector is increasingly concerned about a possible bankruptcy domino trend, as Dongdo, representative of North Jeolla Province, went out of business only eight days after Sejong Construction went belly up on September 4.

A cap on apartment sales prices, restrictions on bank loans, and strengthened tax regulations all contributed to the growing number of unsold apartment units, which could result in future bankruptcies of medium-sized construction companies that are strapped for cash.

According to the Ministry of Construction and Transportation, the number of unsold apartment units in Korea is 89,924 units as of late June, which is slightly lower than the record 102,701 units at the end of 1998. Most of the unsold apartment units are located outside Seoul where medium-sized companies are doing business.

Indeed, Sejong Construction experienced financial difficulties as many of its apartment units in Busan and Yeosu, Jeonnam were not sold. One official at the Korea Housing Builders Association said, “The situation is very serious because the companies that went under were leading construction companies in their respective regions. Without large scale deregulations that solve existing issues, more companies will face the same fate as the bankrupt ones.”

jefflee@donga.com koh@donga.com