‘Zombie’ developers increase in South Korea as property market wobbles

THE share of South Korean developers struggling to pay interest expenses on their loans rose by a quarter last year as the central bank aggressively tightened policy and the local housing market began to wobble.

Some 36.1 per cent of listed developers were unable to fully cover interest expenses with operating profit as at the third quarter of last year, according to a Bank of Korea (BOK) report released on Thursday (Mar 23). That figure is up from 28.9 per cent in 2021.

The share of so-called zombie firms may increase again this year, as the BOK has since raised rates further. A growing number of unsold homes is also making it difficult for developers to pay back short-term debt, known as project financing (PF). PF was at the heart of a credit rout last year, when the government-backed developer of Legoland Korea missed a debt payment. It has since met its obligations.

South Korean policymakers see PF loans in the construction sector as among the larger risks that the economy faces this year, because financial firms are often behind them. Risks are larger for small and medium-sized developers, the BOK said, calling for more scrutiny of their debt positions. Rising commodity costs were another factor that amplified developers’ financial difficulties, it said. BLOOMBERG