The debt of major large domestic builders increased by nearly 17 trillion won over three years and six months. Construction costs surged due to inflation, and as unsold housing worsened and accounts receivable could not be properly collected, external borrowing fund increased. Credit rating agencies are also forecasting that builders' financial burdens will continue to grow.
According to NICE Investors Service on the 19th, the net borrowing fund of 10 builders — Hyundai E&C, DL E&C, Daewoo E&C, POSCO E&C, Lotte Construction, GS Engineering and Construction, HDC Hyundai Development Company, SK ecoplant, KCC E&C, HL D&I Halla, Kolon GLOBAL — totaled 16 trillion won in the first half of this year. This is the amount excluding borrowing fund from the builders' cash and cash equivalents. At the end of 2021, cash and cash equivalents were 800 billion won higher, but in three years and six months, net borrowing fund increased by 16.8 trillion won.
Revenue was generated, but accounts receivable, which remain as claims because construction costs and other amounts have not yet been collected, also surged. The accounts receivable balance grew 83.5% (15.4 trillion won), from 18.4 trillion won at the end of 2021 to 33.8 trillion won in the first half of this year.
The simultaneous increase in builders' accounts receivable and borrowing fund can be interpreted as failing to properly collect money to be received (accounts receivable) while only pulling in external debt (borrowing fund). The main reasons are the burden on working capital due to the accumulation of unsold homes and the materialization of project financing (PF) contingent liabilities. According to the Ministry of Land, Infrastructure and Transport, as of the end of June this year, the number of unsold dwellings nationwide was about 63,734. Among them, unsold dwellings after completion, known as malignant unsold units, were estimated at 26,716.
NICE Investors Service analyzed, "Builders are securing liquidity through the sale of held asset and direct and indirect support from affiliates, but the prolonged downturn in the construction economy is expected to keep financial burdens high." It also said, "Due to the polarization of the domestic real estate market, the financial burdens of builders with a high proportion of business sites in regions that show inferior business viability will expand further."
Kim Chang-su, a senior researcher at NICE Investors Service, said, "As the sales rates at presale business sites, especially in regional areas, remain low for long periods, the likelihood of collecting accounts receivable (such as construction cost payments) is decreasing."
Delinquency rates on loans such as project financing (PF) from financial institutions are also rising. The delinquency rate on bridge loans (PF at the land acquisition stage) climbed from 8.3% at the end of 2023 to 15.2% at the end of March this year. The delinquency rate on land-backed loans also nearly quadrupled over the same period, from 7.2% to 28.1%.
Meanwhile, there is analysis that the government's push to strengthen safety will act as a burden on builders' profitability going forward. In the "comprehensive plan for labor safety" announced on the 15th, the government said it would ▲ impose a penalty surcharge within 5% of operating profit on corporations with three or more fatal accidents per year ▲ expand the grounds for business suspension in the construction industry to include multiple annual fatalities ▲ revoke construction business registration if an additional cause for business suspension arises after two business suspensions in three years ▲ expand restrictions on participation in public bidding, and otherwise raise the level of punishment for serious industrial accidents. NICE Investors Service analyzed, "Additional costs such as extensions of construction deadlines due to strengthened safety management are expected to weigh on builders' profitability."
Lee Eun-hyung, a research fellow at the Construction and Economy Research Institute of Korea, said, "The government's direction emphasizing worker safety is correct, but in the short term, a transitional period in which expenses borne by builders increase due to longer construction deadlines will continue for the time being," adding, "The industry should work to ensure that appropriate construction deadlines for safe projects and the corresponding appropriate construction costs are calculated going forward."