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April 21, 2024

8 in 10 builders struggle to pay back debt interest

PUBLISHED : February 20, 2024 - 09:07

UPDATED : February 20, 2024 - 10:00

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A construction site in Seoul (Yonhap)

Eight out of ten construction firms here said they are experiencing difficulties in paying debt interest, according to a local survey released on Monday.

According to the Federation of Korean Industries' survey involving 102 construction companies among the top 500 construction firms, 76.4 percent of the respondents said they are experiencing difficulties paying debt interest with their operating profit. Only 17.7 percent said they can cover debt interest with their profits.

“Not only small and mid-sized construction firms but also large construction firms are going through a difficult time,” an official from one of the largest construction companies said on condition of anonymity.

The report said that 72.5 percent of construction companies are using borrowings from financial institutions as their main financing measure, and more than the majority of the companies are burdened with the current interest rate of 3.5 percent.

“Even for large construction companies, it is difficult to get real estate project financing from financial institutions these days. Paying off the borrowings has become difficult due to interest rate volatility,” the official added.

According to the report, around 38 percent of the respondents also said their financial situations are in trouble, while 43.1 percent said their financial situations are similar to previous years, the report noted.

Over 30 percent of the construction companies also answered that they are pressured by increasing construction material and labor costs. Some 25 percent said the high interest rates are negatively impacting their financing, and 16.7 percent said reduced construction orders have made their financing more difficult.

“Prices of construction materials have been increasing rapidly since last year, weighing on construction firms’ operations,” the official said.

When asked about the second-half outlook, 52.9 percent of the construction companies answered that their financial conditions would remain similar, and 33.4 percent expected their financing to become worse. Only 13.7 percent of the respondents said their financial situations would improve in the second half.

“Construction companies are expected to continue to limp along until the end of this year,” the FKI report said.

Industry sources anticipated that the stagnation in the local construction market may continue even after this year. “Construction firms are concerned about when the setback will end,” another source from a local construction company said.

Meanwhile, the report added that around 39.2 percent of construction companies said they need policies that can help them reduce interest payments.

“Financial conditions of local construction companies are becoming worse due to high interest rates, inflation and the limping construction market,” said Lee Sang-ho, the head of the federation's economic and industrial policies division. “Construction firms are in need of policies that can reduce debt interest, raw material costs and extend construction periods." 

By Shim Woo-hyun (ws@heraldcorp.com)

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