Korea Land and Housing Corporation (LH) will reduce the delay penalty rate (interest rate on arrears) applied to construction companies unable to pay land sale proceeds from next month by 1 percentage point. The move aims to alleviate the burden of interest on arrears in land payments as small and medium-sized construction companies face bankruptcies amid ongoing real estate market stagnation. Last year, the amount of land payments in arrears was estimated at around 6 trillion won, and construction companies are expected to save about 60 billion won in interest burden due to this measure.
The construction industry noted that while this decision will be helpful, it will be difficult to reverse the prevailing atmosphere of stagnation in the construction market.
According to LH on the 10th, the agency announced that it will reduce the current delay penalty rate applied to land sale payment arrears from 8.5% to 7.5% starting from the 1st of next month. ☞Related article [Exclusive] Construction companies, unable to pay for land purchase worth 6 trillion won... LH lowers the land payment arrears interest rate.
LH's decision is intended to alleviate the burden on construction companies that are unable to repay land costs due to worsening insolvency from the construction market stagnation. When the real estate market was booming, construction companies hastily purchased land from LH, hoping for significant profits. However, as the real estate market has stagnated, more construction companies are increasingly unable to repay land costs even after receiving land for residential projects from LH.
With the reduction in LH's land payment arrears interest rate, construction companies expect to save around 60 billion won in interest costs. The scale of LH's land payment arrears reached around 6 trillion won in the first half of last year. The scale of land payment arrears increased from 2.0689 trillion won in 2021 to 3.855 trillion won in 2022, and is projected to rise to 6.9281 trillion won in 2023.
LH also decided to increase the price when purchasing apartments built by private construction companies in public housing sites for rental purposes. Despite a significant rise in construction costs, construction companies have requested that the unit price for rental housing purchased by LH be increased, as it was unreasonably low, leading to substantial losses during project execution. The acquisition unit price for rental housing will rise from 100% of the existing standard construction cost to 110%.
A Ministry of Land, Infrastructure and Transport official stated, "With construction companies requesting an increase in the purchase price due to the burden of LH's public rental housing purchase price being set at the standard construction cost in a poor construction market, we plan to apply this increase after revising the land development operation processing guidelines."
In the construction industry, this measure is seen as being helpful to companies facing liquidity crises. However, many believe it falls short of fundamentally resolving the poor performance of construction companies in the difficult real estate market.
A construction industry representative said, "The reduction in interest on land payment arrears will be somewhat helpful to construction companies that are struggling financially," but added, "Some construction companies intentionally delay payments to return the land they acquired, so this reduction in the arrears interest rate seems unlikely to directly contribute to expanding housing supply or recovering the construction market." Another construction company representative explained, "The existence of land payment arrears means that the land is currently difficult to commence work on," and added, "While the reduction in interest rates may help somewhat, it likely won't be significant enough to feel the impact."