Most big builders sit on verge of bankruptcy

The slumping housing and real estate markets are now threatening to topple even the country’s biggest builders. / Korea Times file

By Kim Tong-hyung

Korea’s increasingly toxic housing market is now threatening to wipe out the cream of the crop in its construction industry, a private think-tank claims. High on the endangered list are builders like Lotte, Ssangyong, Halla, Kolon and Keangnam.

With house prices freefalling and unsold homes piling up, the KS Economic Institute (KSERI) insists that most of the country’s top-50 builders are toying with bankruptcy, and one can almost hear the collective nodding and sighing among 13 of the firms that are already in different phases of insolvency processes.

Apart from the sidelined companies, KSERI picked 19 more builders that it sees as facing immediate prospects of insolvency, whether this year or the next, and red-flagged 13 others. Only five among the 50-biggest construction companies were given a clean bill of health.

“Insolvencies have been increasing fast among small builders since 2008, expanded to mid-sized builders in 2010 and have spread further across the top-50 firms starting this year … The whole industry is engulfed in illness,” the report said.

“Construction orders have been declining sharply since 2010 and revenue from projects that are completed or underway is expected to start declining this year. Insolvencies are already increasing among builders depending heavily on homes or construction based on project-financing.”

KSERI’s analysis is based on the rather simplistic math of debt-to-equity ratios, although the researchers claim this doesn’t make their arguments any less true.

Among the top-50 builders, 26 of them had borrowing ratios higher than 200 percent as of the end of last year. The group includes SK Engineering and Construction, Doosan Engineering and Construction, Hanjin Heavy Industries, STX Construction, Ssangyong Engineering and Construction, and Kolon Construction. Separately, firms such as Kumho Industrial, Dongil Construction and LIG Engineering and Construction have already entered a workout phase or court receivership.

“Construction companies with debt-to-equity ratios of over 200 percent have to be seen as in very serious danger of falling into insolvency,” the KSERI report claimed.

Out of desperation, builders have been aggressively touting new homes and pushing more project-financing schemes since last year, despite the continued decline in the number of homebuyers. This has triggered a vicious financial cycle that has pushed more companies toward the brink, according to KSERI.

Among the top-50 builders, 33 firms have guaranteed a larger amount of construction loans than their equity capital. This group includes Lotte Engineering and Construction, Hanwha Engineering and Construction, KCC Engineering and Construction, Halla and Keangnam Enterprises as well as the previously mentioned SK, Doosan, Ssangyong, STX, Kolon and Kumho.

The report claimed that snowballing losses for Lotte warrant grave concern, while Ssangyong, Keangnam, Halla and Kolon may struggle to cope with their burden in project-financing loans.

The construction sector has been hit by a wave of bankruptcies since the 2008 recession on skidding home sales and tighter lending. Just over a quarter of the top-100 construction firms, or 28 companies, have filed for either court receivership or workout plans led by creditors. And more than 300 closed for business just during 2010, resulting in the lowest number of registered builders in nine years.

Builders have been struggling to repay their debts and are concerned that the slumping property market has also eroded the patience of lenders, who appear ready to bail at the slightest sign of trouble.

The prolonged real estate slump has already triggered a secondary banking crisis here, although the Financial Supervisory Service (FSS) put out the initial flames by suspending some of the country’s largest savings banks.

The secondary banks indulged in a lending spree over the past decade, principally funding construction and real estate investments, to exploit the massive speculative demand spawned by property.

This came tumbling down in the economic turmoil, which had banks running for cover and calling in loans. Borrowers unable to repay led to crises at a large number of savings banks before regulators mercifully pushed them to the sidelines.

As bad as the property market looks now, some observers believe things will get worse before they get better. Transactions are disappearing even faster than before, making a mockery of government attempts to artificially boost housing demand.

According to property market researcher Real Estate Serve, the year-on-year price changes for more than 60 percent of Korean apartments lag the rate of consumer price inflation, which was 4.7 percent last month.

And property values continue to slide in Seoul and the metropolitan area, which have been at the core of the country’s property bubble. Apartment prices dropped by 0.66 percent in Seoul between January and July, compared to the 1.04 percent decline in Gyeonggi Province and a 2.04 percent slide in Incheon.