The South Korean government announced a comprehensive support package for the construction industry. (Image courtesy of Yonhap)
SEOUL, Dec. 24 (Korea Bizwire) — The South Korean government announced a comprehensive support package for the construction industry on December 23, responding to mounting challenges including soaring construction costs, a tightening project financing (PF) market, and increasing unsold housing inventory.
The measures come as the construction sector faces significant headwinds, with construction investment showing a continuous decline since the fourth quarter of last year. The Bank of Korea projects a further 1.3% decrease in construction investment for the coming year, while the Construction Business Survey Index (BSI) has fallen below 50.
Industry concerns are growing about a potential domino effect that could impact both major construction companies and their subcontractors. Already, 27 construction companies have filed for bankruptcy through November of this year, marking the highest number since 2019.
At the heart of the sector’s troubles is a dramatic 30% surge in construction costs between 2020 and 2023, driven by rising raw material prices and labor costs. This has led to widespread project delays and suspensions. The impact is particularly evident in large-scale public projects worth more than 30 billion won, where the bid failure rate reached 51% in the first half of this year, more than double the 23% rate seen in the first half of 2020.
The government’s new package includes several key measures to address these challenges. For public construction projects, the winning bid rate will be increased by 3.3 percentage points for medium-sized projects (10-30 billion won) and 1.3 percentage points for larger projects (over 30 billion won). General management fee rates will also be raised, with projects under 5 billion won seeing an increase from 6% to 8%, and those between 5 and 30 billion won rising from 5.5% to 6.5%.
To stimulate private sector investment, the government plans to ease restrictions on pre-sales for companies under business suspension. For companies facing suspensions of 3 to 6 months, the pre-sale restriction period will be reduced from 18 months to 12 months. Those with suspensions of 1 to 3 months will see their restriction period cut from 12 months to 6 months. However, companies suspended for six months or more due to serious violations will continue to face existing restrictions.
The package also addresses the growing problem of unsold housing inventory, which has increased fivefold over the past three years from 14,000 units in October 2021 to 66,000 units in October of this year, with 79% located outside of major urban areas. The Korea Housing & Urban Guarantee Corporation (HUG) will establish a special review channel to support Corporate Restructuring Real Estate Investment Trusts (CR-REITs) and provide consulting services for risk assessment.
Industry experts have welcomed the government’s initiatives but note that additional support may be needed for ongoing projects.
“Companies are either selectively bidding on new projects or avoiding them altogether due to high construction costs and declining profitability,” said Lee Ji-hye, a researcher at the Korea Research Institute for Construction Policy.
“The government has recognized this issue and begun to respond.”
However, some industry representatives argue that the measures should be applied retroactively to existing construction sites, particularly given ongoing cost disputes with public institutions that continue to affect many projects.
M. H. Lee (mhlee@koreabizwire.com)
