Builders desperately need financial aid, tax breaks

The Korea Times

The Korea Times

Business

Wed, November 29, 2023 | 13:39

Companies

Builders desperately need financial aid, tax breaks

Posted : 2023-01-02 16:40

Updated : 2023-01-03 16:32

Construction of an apartment complex remains suspended in Gwangju in this photo taken on Nov. 30. Korea Times file

By Lee Kyung-min

Heads of local construction associations urged the government to extend tax breaks and other financial aid in a desperate call to limit mounting industry uncertainties concerning plunging market demand and a liquidity crunch, according to industry officials, Monday.

"The housing and construction market is in need of immediate government assistance," Construction Association of Korea Chairman Kim Sang-soo said in a New Year message.

Behind the urgency lies extreme difficulties in the construction industry in the last year, including a significant reduction in government spending on social overhead capital (SOC), a slowdown in housing and construction industries and project financing failures.

"We will make greater private-led investments, a task equally critical as the government's increasing SOC spending to create more jobs and reinvigorate slumping regional economies," Kim said.

Similarly, International Contractors Association of Korea Chairman Park Sun-ho said that tightening global construction market conditions this year will pose a major risk to local builders.

"We need resilience more than ever to weather the sudden uncertainties and prolonged shocks from years of the COVID-19 pandemic," he said in a New Year address.

"The global economy is bogged down by rising raw material prices and supply chain bottlenecks. The unfavorable factors notwithstanding, we will continue efforts to push up the country's cumulative overseas construction orders to exceed $900 billion."

Chief among the collective fears is a rollover risk of 17 trillion won ($13 billion) associated with project financing asset-backed commercial papers this month, in a back-to-back uncertainty over refinancing similar short-term maturing debts of 10 trillion won and 5 trillion won in February and March, respectively.

The acute liquidity crunch was sparked and amplified by the default in October of a local public enterprise that had been funding the development of Legoland. The theme park developer despite guarantees by the Gangwon Province government unexpectedly failed to refinance a maturing debt of about 205 billion won, prompting a rapid tightening of borrowing conditions for small to medium-sized construction firms. Their difficulties were compounded further by inflation-countering sharp key rate hikes and subsequent plunges in housing purchases.

Market watchers said last year's crunch was limited to a liquidity crisis. But this year could see full-blown credit risks and shocks to the real economy brought on by project financing failures.

Project financing refers to the financing of long-term infrastructure, industrial projects and public services. The debt and equity used to finance the relatively high-risk projects are paid back from the cash flow generated by the project, rather than from collateral put up before the projects begin.

Gov't support is vital

Whether and by how much their calls would induce expanded government guarantees remains to be seen. The financial authorities said about 10 trillion won in government guarantees will be provided to stabilize local project funding markets in the form of longer-term loans and lengthened maturity for builders of unsold homes.

Land ministry data showed the number of unsold homes in the country came to 58,027 as of last November, up 22.9 percent or 10,810 from the month before.

The 38-month high since 60,062 in September 2019 is the fastest monthly increase of over 10,000 after December 2015 when it hit 11,788.

The figure is close to 62,000, the level that Land Minister Won Hee-ryong said last month the government considers a "breaking point" for the industry.

The number of unsold homes in Seoul, Incheon and Gyeonggi Province combined came to 10,373 as of last November. It was up 36.3 percent from the month before.

lkm@koreatimes.co.kr