The government is pushing a plan to restrict advance sales (先分讓) for apartment construction by builders where fatal accidents occurred. If advance sales are not allowed, builders will not be able to cover hundreds of billions to trillions of won in apartment construction funds with sales proceeds.
According to the Ministry of Land, Infrastructure and Transport on 16th, the ministry is pushing to toughen measures to restrict advance sales for builders where serious industrial accidents occurred.
Under the advance sales system, a builder pre-sells apartments before construction and covers construction costs with sales proceeds such as down payments and interim payments that consumers make over the two to three years of construction. Builders can proceed with projects smoothly because they can secure construction costs for apartment projects without raising large funds on their own. Another advantage is that securing occupants in advance through pre-sales reduces the risk of unsold units that may arise after the apartments are built.
Currently, the government restricts advance sales for builders that received business suspension due to poor construction work. Builders whose business suspension period due to poor construction is six months or longer cannot sell during the construction period. They can only proceed with sales after construction is completed and after passing the use inspection.
The Ministry plans to limit the timing of occupant recruitment not only in cases of poor construction but also when serious industrial accidents occur by revising the rules on the supply of dwellings. The measure to expand the scope of advance sales restrictions is expected to take effect next year.
A Ministry official said, "Currently, we impose an advance sales restriction period of three months to two years on companies only when they engaged in poor construction, depending on the business suspension period," adding, "This time, we will establish a new item so that, if a fatal accident occurs and the Minister of Employment and Labor requests a business suspension and business is suspended, we will set the advance sales restriction period according to this duration."
If this happens, builders where serious industrial accidents occurred are expected to take a hit to business activities. Because pre-sales before apartment construction would be impossible and they could not cover necessary construction funds with sales proceeds, they would have to raise funds on their own through loans or bond issuance, increasing their burden. On top of that, as the government decided to disadvantage builders where serious industrial accidents occurred in loan interest rates or limits, it will likely be difficult to secure necessary funds at low rates. Also, because advance sales would be impossible and occupants would have to be recruited after apartment construction, the risk of unsold units is expected to grow.
However, the construction industry is concerned about the move to expand the scope of advance sales restrictions. They say that constraints on business activities to push dwelling projects could lead to contraction in dwelling supply. A construction industry official said, "Even if builders strengthen safety measures, accidents cannot be completely prevented," adding, "If advance sales are restricted, there will likely be more business sites where profitability falls, which could create constraints on supply. If financing rates for construction funds also rise, construction costs are likely to increase further."
Meanwhile, the government the previous day announced a comprehensive labor safety plan and said it would push a measure to impose a penalty surcharge of up to 5% of operating profit when three or more fatal accidents occur in a year to prevent serious industrial accidents. It will also expand the grounds for requesting business suspension by adding the requirement of "multiple deaths in a year" to "two or more deaths at the same time." It will establish a rule allowing the authorities to request deregistration if a builder that received two business suspensions in the past three years again triggers grounds for a business suspension request.