The 'Familie Piazze' constructed by Sindoong A Construction set a record high selling price of 779 million won when it was released in September 2022 for the urban development project located north of Jinju Station in Jinju, South Gyeongsang Province. Although it was promoted as a luxury townhouse, only half of the total 104 units were sold by the end of 2023, resulting in significant unsold inventory. Sindoong A Construction, along with other projects, faced a rapid increase in accounts receivable in the case of its business sites in Uijeongbu, Gyeonggi Province. The accounts receivable amount, which was 71.9 billion won in 2020, surged to 214.6 billion won in 2023, nearly tripling in three years. Ultimately, Sindoong A Construction, which struggled to recover its accounts receivable, applied for corporate rehabilitation in January this year.
The significant unsold inventory at local project financing (PF) business sites is leading to an increase in accounts receivable among major construction companies. Last year, the accounts receivable among major construction companies increased by 2 trillion won from the previous year to nearly 34 trillion won. Accounts receivable refers to the amount owed to construction companies for work completed but not yet paid. As sales have not materialized at local business sites, the situation worsens for construction companies as they fail to receive payments from the project operators. As money stagnates, construction companies' reliance on borrowing funds has also increased.
According to Korea Ratings on the 24th, the accounts receivable for 15 construction companies with credit ratings (AA, A, BBB) was provisionally estimated at 33.7 trillion won at the end of last year. This represents an increase of 2 trillion won from the end of the previous year (31.7 trillion won). Compared to the accounts receivable in 2020 (16.5 trillion won), before the surge in construction costs caused by the Ukraine war and inflation, the amount has more than doubled.
When analyzing construction companies' accounts receivable by credit rating, it was found that the accounts receivable of high-rated construction companies like Hyundai E&C and DL E&C increased from 1.02 trillion won the previous year to 1.1 trillion won, marking an increase of 80 billion won. The accounts receivable of seven companies with an A rating, including Daewoo E&C, GS Engineering and Construction, POSCO E&C, and Lotte Engineering and Construction, rose by 140 billion won from the previous year, from 18.3 trillion won to 19.7 trillion won. However, six companies with a BBB rating, such as KyeRyong Construction Industrial, Hanshin Engineering & Construction, and Dongbu Corporation, saw their accounts receivable decrease from 3.2 trillion won to 3 trillion won, down by 200 billion won.
Park Chan-bo, a senior researcher at Korea Ratings, noted, "Sales must be strong for project operators to collect money and pass it to construction companies, but the increase in unsold inventory, particularly in a couple of local PF business sites, has intensified the stagnation of funds. The companies have carried out the construction, but delays in collecting payment for the work have become a recurring issue." Park added, "Since the second half of 2022, the sales rate has been significantly poor, and especially when sales do not happen at one or two local PF business sites, the accounts receivable can pile up by hundreds of millions of won."
According to Statistics Korea, the initial sales rate of private apartments was 70% on average for the metropolitan area as of the end of the third quarter last year, while in the provinces, it was only 48.4%, falling short of half. Particularly, the average for metropolitan cities is just 41.9%, indicating that nearly 60% are in an unsold state.
The increase in unsold inventory and accounts receivable has led to a 'liquidity crunch' for construction companies. The borrowing fund reliance, which is the ratio of total borrowed funds to total assets, has risen among all construction companies regardless of their credit ratings. The reliance for AA-rated construction companies increased from 10.4% in 2023 to 11.8% last year, up 1.4 percentage points. Similarly, the reliance for A-rated construction companies rose from 25.6% to 27.3%, a 1.7 percentage point increase, while BBB-rated construction companies increased their reliance from 34.8% to 34.9%. Korea Ratings commented, "Due to the sluggish real estate market leading to decreased pre-sales, delays in collecting construction payments, and increased expenditures on lending, there is a dependency on external funding."
Kim Young-deok, a senior researcher at the Korea Construction Industry Research Institute, stated, "Although the construction market is experiencing long-term contraction leading to worsened cash flow, essential expenses related to management, operations, and new projects continue to arise. Consequently, the borrowing fund situation is bound to increase." He added, "This phenomenon has been prominently reflected in financial statements since the end of last year."