This year, the number of construction companies showing signs of insolvency within the top 100 in construction capacity has increased by more than 30%. In particular, the risk of insolvency has heightened among construction companies with a high proportion of local dwellings in their housing projects. As the construction industry continues to slump, the possibility of bankruptcy among small and medium-sized construction companies has gradually grown.
According to a construction company risk analysis report from NICE Credit Rating on the 11th, the number of construction companies showing signs of insolvency ranked within the top 100 in construction capacity this year is 15. This is about a 36% increase compared to the previous year (11 companies).
The indicators used to determine whether a construction company shows signs of insolvency are ▲operating losses (operating profitability below 0%) ▲excessive liabilities (liability ratio exceeding 400%) ▲excessive net borrowing (net borrowing dependence exceeding 40%) ▲excessive accounts receivable (accounts receivable/total assets exceeding 30% and accounts receivable/sales exceeding 35%).
The pace of insolvency among construction companies ranked 31st to 100th in construction capacity increased rapidly. While only two construction companies in this range showed signs of insolvency in 2022, the number of companies with deteriorating management conditions surged sharply starting the following year, as the construction market worsened. The number of construction companies showing signs of insolvency increased to seven in 2023, ten in 2024, and fourteen this year. In contrast, only one construction company in the top 30 ranked by construction capacity has shown signs of insolvency since 2022.
Most of the construction companies showing signs of insolvency have met two or more indicators of insolvency. These corporations recorded a liability ratio of 393.2% based on the previous business year. The net borrowing dependence also reached 36.4%. The proportion of accounts receivable (total construction receivables and unbilled construction) relative to total assets and the proportion of accounts receivable relative to sales were also revealed to be excessive at 31.7% and 37.5%, respectively.
Medium-sized construction companies with a high proportion of local dwellings showed a higher possibility of insolvency. Due to the polarization in the housing market, the ongoing downturn in the real estate market outside the capital region is hitting construction companies based in those areas hard.
As the real estate market in the provinces is in a slump, the number of unsold dwellings is increasing sharply. The volume of unsold properties after completion, referred to as 'malignant unsold dwellings,' surpassed 23,000 cases in February, reaching its highest point in 11 years and 4 months, with the provinces accounting for 81% of this total. If construction companies experience ongoing unsold inventory after completing apartments, they are likely to face financial difficulties as they cannot recover funds.
For large construction companies, the proportion of contract work in the housing business located in the capital region was 62.2%, indicating a higher concentration of business in relatively profitable areas. In contrast, for medium-sized construction companies, this proportion was only 50%. The share of contingent liabilities related to project financing also concentrated in provincial business sites at 65.2%.
Many of the construction companies that have gone bankrupt this year are also those based in provincial areas. Daehung Construction, which recently announced plans to prepare for court management (corporate rehabilitation procedures), is the leading construction company in the Chungbuk region. Daejeon Construction, the second-largest construction company in Gyeongnam, also applied for court management.
An industry representative noted, "While most construction companies are struggling due to the downturn in the construction market, the small and medium-sized construction companies in the provinces that are weaker than large construction companies are in a difficult situation," and emphasized, "Measures are needed to revitalize the local real estate market, going beyond the purchase of unsold inventory in the provinces."