Business closures among regional construction firms have jumped more than 37% over the past year, and a growing number of small and mid-sized builders are running into liquidity trouble as they fail to collect payments on completed work or face project financing guarantee obligations coming due. The bad debt that developers and contractors cannot absorb is spreading to real estate trust companies. Trust account loans — the trust firms' own money injected to keep projects afloat — have approached 10 trillion won, while loan-loss reserves are rising quickly, in what analysts describe as the lingering aftermath of the project financing troubles that surfaced after the 2022 Legoland default.
Public notices of closure filings by general construction firms outside the capital area totaled 418 from January through the 27th, up 63.9% from 255 in the same period last year, according to the Construction Industry Knowledge Information System (KISCON) operated by the Ministry of Land, Infrastructure and Transport. Closure filings by specialty construction firms rose 31.5% to 1,597 from 1,214 over the same period. Combined, closure filings for general and specialty construction were up 37.2% year-on-year.
Taewang E&C, which recently entered court receivership, is cited as a prime example of deteriorating liquidity among regional builders. Ranked 67th nationwide and third in the Daegu area in this year's construction capability evaluation, Taewang E&C posted revenue of 323.1 billion won and operating profit of 22.6 billion won last year. But the company ran short of cash as collection of construction payments and loans at provincial sites was delayed and about 110 billion won in project financing guarantee obligations came due. As of the end of last month, the company's cash holdings had shrunk to a few hundred million won, according to reports.
Mid-sized builders are also finding their cash positions tighter. Among firms ranked 30th to 100th in construction capability, the 12 whose financials are comparable saw cash and cash equivalents fall 13.2% to 1.1057 trillion won in the first half of this year from 1.2732 trillion won a year earlier. Short-term borrowings, by contrast, rose 4.4% to 840.3 billion won from 805.2 billion won. Ten of the 12 posted operating profits, but seven reported negative operating cash flow, pointing to a gap between book profitability and actual cash movement. Unbilled receivables over the same period rose 12.2% to 787 billion won from 701.3 billion won. Unbilled receivables do not in themselves indicate bad debt, but a widening gap between billing and collection can weigh on cash flow.
The burden of project financing losses is also shifting to the trust industry, which has injected funds in place of developers during development projects or taken on completion guarantee obligations. In particular, trust account loans are swelling rapidly as trust firms increasingly put in their own money to keep projects going when presale proceeds or loans alone cannot cover construction costs at sites with weakening business prospects. Net trust account loans at 14 real estate trust firms rose 6.1% to 9.5165 trillion won in the first half of this year from 8.9726 trillion won at the end of last year, according to the financial investment industry. Loan-loss reserves against trust account loans rose 12.6% over the same period to 2.9329 trillion won from 2.6058 trillion won. Not only has the money trust firms put into project sites increased, but concerns are also mounting over how much of the existing funds can be recovered.
Earnings have deteriorated as well. The 14 trust firms posted net profit of 75.9 billion won in the first quarter but swung to a net loss of 158.6 billion won in the second, leaving a cumulative first-half deficit of 82.7 billion won. The shift is attributed to funds being tied up for extended periods as trust firms covered construction costs and other expenses amid continued delays and unsold units, centered on land trust projects with completion guarantees.
The construction industry expects that clearing existing troubled project sites will take considerable time even as project financing restructuring proceeds. Recovery in provincial housing markets and in non-apartment segments remains slow, while high construction and financing costs persist. "Separately from whether new project financing is supplied, how much of the construction payments and invested funds can be recovered at projects already under way is becoming the key variable dividing the financial soundness of builders and trust firms," an industry official said. "The longer normalization of these sites is delayed, the longer contractors and trust firms will have to bear the losses."
