Builders increasingly worried about increasing number of unoccupied apartments

Seen above are apartment complexes in Gangnam-gu, Seoul, Sunday. Domestic construction firms are increasingly concerned over the increasing number of unoccupied apartments, particularly in provincial areas, amid interest rate hikes and the oversupply of new apartments. / Yonhap

By Nam Hyun-woo

Construction firms are increasingly concerned about the increasing number of unoccupied apartments in recent months as buyers face greater difficulties getting mortgages or finding tenants.

With more owners delaying their payments to builders, this has begun adversely affecting the profitability of Samsung, GS, Hyundai, Daewoo, Daelim and other apartment builders.

This phenomenon is particularly apparent in provincial areas in line with the increasingly unfavorable housing market amid interest rate hikes and the oversupply of new apartments.

In selling new apartments here, builders designate move-in periods, generally one to two months, in order to avoid having too many residents moving in all at once. During the move-in period, new residents finish up paying for their apartments and receive the key to their apartment in return.

Generally, the apartment price is paid through three steps: 10 percent as a deposit, 60 percent as the intermediate payment during construction and 30 percent immediately before occupying the apartment.

Since it is up to the dweller to choose to actually live in the apartment, sell it, rent it or keep it empty after making the payments, builders think of a fully paid-for apartment as occupied.

According to the housing institution, 42 percent of those who kept their new apartments unoccupied said they did so because they couldn't get a tenant or were delayed in selling their other homes, while 23.2 percent failed to secure loans to finish paying for their new apartment.

Builders pay keen attention to the occupancy rate because it not only affects their revenue stream but also their financial planning. To contain the number of unoccupied homes, builders impose high interest rates on those who don't take their home keys within the move-in period.

“Construction firms designate the move-in period not only to spread out residents moving in but also to plan their revenue, such as when they can receive payments from apartment buyers,” a domestic construction firm official said.

“The occupancy rate may not be a barometer as obvious as their apartment-selling performance, but it is one of the key factors affecting their earnings,” another construction firm official said.

Those concerns were also detected in credit ratings for housing.

According to a recent report by Korea Ratings, a domestic ratings house, GS E&C, Daewoo E&C, Doosan E&C and a number of mid-sized builders are exposed to risks stemming from those unlived-in apartments.

“In terms of GS and Daewoo, the volume of their apartments about to embrace residents is huge, raising their risks,” the report read. “For Doosan, their apartments are mostly located in risky areas that have low occupancy rates.”

The report designated Ulsan, Gyeongsang Province, Chungcheong Province and a number of cities in Gyeonggi Province as risky areas as they have relatively low occupancy rates.

GS and Daewoo each have nearly 20,000 apartments scheduled to receive residents in those areas this year. Their volume is almost twice that of Hyundai E&C with 10,000 apartments.

Adding more concern, the outlook for the occupancy rate remains grim for this month too. The housing institution's Housing Occupancy Survey Index for April stood at 70.4 points, down 3.4 points from a month earlier. A higher reading means builders are positive about occupancy.

“The increase in the number of unlived-in apartments leads to builders' financial difficulties,” the construction firm official said. “And that can also deflate the entire housing market.”