Preemptive restructuring needed to quell rumors in construction industry

"They speculate about the post-election scenario, but government affairs don't unfold that way," remarked Minister of Land, Infrastructure, and Transport Park Sang-woo at a press conference marking the 100th day of his tenure on Tuesday. His statement refutes the recent talk of an 'April crisis theory in the construction industry.' This stance echoes the President’s Office assertion that "(Crisis rumors) hold no merit."

Even during the Legoland incident in late 2022, concerns about a crisis in the construction industry loomed large. Speculation even circulated about a 'list of bankrupt construction companies,' naming specific entities. Yet, a catastrophic wave of bankruptcies didn’t-‘t materialize. Will history repeat itself, with these current fears dissipating as mere hearsay? Minister Park remarked at the meeting, "As of the end of February, construction starts, sales, and occupancy rates have shown significant improvement compared to last year, allaying concerns of a hard landing." However, the statistics paint a different picture than Minister Park's assertions. The number of unsold homes reached 64,874 in February, marking a third consecutive monthly increase since December. Moreover, the count of unsold completed units, categorized as malicious, has risen for seven consecutive months since August. While construction starts, sales, and completions all saw increases in January and February compared to the same period last year, permits and approvals actually declined.

The rise in sales and completions poses a challenge rather than a cause for celebration. If the surge in volume cannot be absorbed by the market, it will inevitably lead to a buildup of unsold inventory. In recent times, many localities have resorted to offering incentives such as free options at the point of initial sale and waiving interest on down payments. This indicates that marketing tactics typically employed after confirming‎ underperformance are now being utilized from the outset. Some developers even delay subscriptions until market conditions improve, only to find themselves compelled to initiate subscriptions as construction nears completion.

The government's construction industry recovery support plan, unveiled on Thursday, falls short of addressing the root issues. As part of the plan, the government reintroduced Corporate Restructuring REITs (CR REITs) to acquire unsold local homes and allocated 3 trillion won through the Korea Land and Housing Corporation (LH) to purchase land held by construction firms. These measures harken back to strategies employed about a decade ago when numerous construction companies teetered on the brink of bankruptcy amid a protracted downturn following the 2009 financial crisis.

While measures to prevent even blue-chip companies from bankruptcy are necessary, there's a notable difference from the financial crisis era. Back then, the government combined support policies with drastic restructuring measures for construction firms. However, currently, there's no visible effort to encourage self-rescue initiatives among construction companies.

Even if the crisis theory lacks substance, failure to address the construction industry bubble will only perpetuate such rumors. We must overhaul the business practices of construction firms that rely heavily on debt or conduct transactions without investing their own capital. During construction booms, financial institutions must refrain from offering "no questions asked loans" without thorough feasibility analysis.

The resurgence of the April crisis rumor may stem from the delayed detonation of the 2022 bomb. Taeyoung Construction, previously listed on hearsay, managed to hold on for a year before succumbing to workouts. Attempting to block imminent issues with temporary solutions is futile. We must recognize the urgency of the situation and take proactive measures to prevent further escalation.