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Home a black hole for builders

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A crane is seen moving to a construction field in Incheon on June 28. Korean builders have been performing well in terms of overseas orders but they are struggling at home due to the frozen housing market and problems financing projects. The industry has been asking the government to ease regulations to help companies stay afloat. [YONHAP]


The cumulative value of overseas construction projects won by domestic builders passed the $500 billion milestone last month, 47 years after Hyundai Engineering & Construction secured a deal to build a highway in southern Thailand in 1965.

However, despite domestic companies’ successful run overseas, the local industry has been wrestling with a stagnant housing market at home since the 2008 global crisis, and local firms are crying out for new revenue streams.

As the nation celebrated its 22nd Construction Day on Monday, President Lee Myung-bak feted the industry’s achievements.

“Korea has become a country that can build infrastructure in any part of the world,” said Lee, who picked up the name “The Bulldozer” after working for Hyundai E&C from 1965 to 1988.

“If we continue to grow strong, this industry will become one of world’s five powerhouses in the overseas construction field and capture $100 billion worth of annual orders by 2014.”

The value of overseas construction projects won by Korean firms rose for seven straight years until last year, when the growth spurt ended due to political turmoil in the Middle East. But despite the drop-off, it still managed a healthy $59.1 billion worth of orders. This exceeded the size of exports of semiconductors ($50.1 billion), ships ($56.6 billion), and automobiles ($45.3 billion).

This year, Korean builders are already on track to hit the $70 billion mark again.

In the first half, local builders signed deals worth a total of $32.1 billion, up 27 percent from $25.3 billion during the same period last year, according to Ministry of Land, Transport and Maritime Affairs.

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However, while the situation is looking rosy overseas, the domestic market is causing more consternation than joy for both the industry and government. The number of unsold houses stood at 62,325 in May, up 940 from April, marking the first expansion since December.

Moreover, according to last month’s report issued by the Construction and Research Institute of Korea (Cerik), the construction business survey index (CBSI) plunged for three straight months, the first time it has done so since March-May 2010.

A CBSI index below 100 indicates that more firms are pessimistic than optimistic regarding the current state of the construction market. Last month it registered 63.8, down 1.6 from May. It was also the lowest number this year since January.

“Despite the government’s ‘5.10 Housing Market Restoration Plan,’ which aims to boost market demand by easing regulations, the housing market in the Seoul metropolitan area has failed to climb out of its recession,” Lee Hong-il, a researcher at Cerik, said of the falling CBSI.

“The liquidity crisis among mid-level construction firms was another major factor as companies like Byucksan and Woolim filed for corporate restructuring last month.”

As the domestic construction industry keeps going downhill, local firms are struggling to survive.

According to an analysis of local construction companies’ financial statements for last year by the Construction Association of Korea (CAK), builders saw their total assets and sales climb 7.4 percent and 12.7 percent from 2010, respectively. However, their overall financial health became more fragile.

The CAK said that, last year, construction companies’ average debt-to-equity ratio rose from 145.12 percent to 150.14 percent, while their loan-to-asset ratio edged up from 22.12 percent to 22.79 percent. In addition, their operating profit-to-sales ratio and return on assets decreased compared to one year earlier.

The CAK said construction companies’ financial stability will be continue to be tested as the housing market remains sluggish and riddled with problems financing projects.

Among the nation’s top 150 construction companies, 25 have either field for court receivership or debt-workout programs since 2008. Their portfolios were mainly based on housing and apartment buildings, indicating that the recessed housing market pushed them to bankruptcy, according to the CAK.

For troubled companies to survive, industry pundits say the housing market should be revitalized, and creditors given active support when the companies embark on new projects.

“The purpose of the debt-workout system and court receivership is to revive troubled firms, but in reality, it’s turning into just another way to collect debts,” an official from the CAK said on the condition of anonymity. “Part of those companies’ income and disposal of assets should be reinvested in their new projects so they can grow.”

For the domestic construction industry to get back on its feet, local builders say the government should first lower its real estate regulations and create more public construction projects.

The CAK said recently that the government needs to come up with a revised supplementary budget on social overhead capital, and that it needs to keep its transportation-energy-environment tax until 2020. The government originally planned to ditch the tax, which is used to finance social infrastructure projects, this year.

Reports also show that many companies are dealing with tight revenue streams. Last year, some 40 percent of local construction companies carried out projects worth a total of 1 billion won or less.

Market demand needs to be boosted to provide these SMEs with their bread and butter, according to the CAK. Lowering acquisition and transfer taxes on real estate are seen as one potential solution, but many people think that easing the debt-to-income (DTI) regulation would be a better answer.

As many house poor feel the pressure of having to pay interest on their mortgages as the price of their properties slowly sinks, industry officials have been pushing the government to relax the DTI regulation, which limits loans in relation to people’s incomes.
By Joo Kyung-don [ kjoo@joongang.co.kr]

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