The domestic REITs (Real Estate Investment Trusts) market is entering a new growth phase, but regulations under the Fair Trade Act concerning large corporations are hindering asset liquidity and market expansion.
Jung Byung-yoon, president of the Korea REITs Association, emphasized in an interview with Aju Economy on June 12 that "project REITs can be a new solution for real estate development and corporate asset liquidity," but noted that necessary institutional improvements must accompany this.
He identified the regulation on large corporations as the primary reason for the significant lag of Korea's REITs market compared to those in the U.S., Japan, and Singapore. "REITs are not companies meant to dominate businesses but investment vehicles for real estate," he said, adding that applying the Fair Trade Act regulations, designed to prevent conglomerate expansion, directly to REITs contradicts the intent of the law.
Jung particularly highlighted the need for urgent reform of holding company regulations. Under the current system, companies within a holding company structure face tiered equity holding obligations when utilizing REITs, compounded by regulations on large business groups, making asset liquidity challenging. The association is pushing for expanded exceptions for unlisted REITs and those belonging to large business groups, as well as allowing REIT investments within holding company structures.
He pointed out, "The government encourages companies to liquidate their real estate through REITs, yet simultaneously restricts their use through holding company regulations. Companies are not trying to dominate but rather to convert buildings and land into cash for R&D or new business investments, which is contradictory."
Jung described REITs as a "conduit," stating, "REITs are merely containers for assets, not operational companies. Actual asset management is handled by asset management companies (AMCs), while asset custody and legal tasks are performed by specialized institutions. Applying the same regulations as general holding companies to a structure that cannot be used as a means of corporate control is a unique 'Galapagos regulation' of Korea."
He predicted that easing regulations would make project REITs a key tool for corporate asset liquidity. Introduced in November 2022, project REITs differ from traditional REITs that purchase and operate completed buildings; they participate directly from the development stage. With lower equity ratios than project financing (PF), they offer greater stability, and the introduction of a tax deferral system for capital gains on in-kind contributions until the sale of shares has increased incentives for corporate and landowner participation.
Jung stated, "When companies contribute their office buildings or logistics centers to project REITs, they can secure funds without the burden of significant capital gains taxes. The funds obtained can be used for investments in semiconductors, artificial intelligence (AI), or R&D, while investors can receive dividends from rental income generated by quality real estate."
He added, "Ordinary citizens can invest in real estate without the need to buy and manage buildings directly, allowing for small investments like stocks. Since professional asset management companies operate the REITs, the management burden is reduced, and they can receive stable rental income from quality properties. This also helps to mitigate speculative demand compared to direct real estate investment."
Jung referenced international examples, noting, "In Japan, Mitsubishi Estate and Mitsui Fudosan, and in Singapore, Temasek-affiliated companies have been expanding the REITs market and continuously supplying quality assets. In contrast, while Korea introduced similar systems around the same time, excessive regulations have significantly widened the market gap." In fact, Japan introduced REITs in 2000, while Korea followed in 2001.
He also assessed the recent JR Global REIT incident as a demonstration of the structural limitations of the REIT system. "REITs are required to distribute over 90% of their profits, which prevents them from accumulating sufficient cash, and the process for capital increases is complicated, making it difficult to respond quickly to liquidity crises," he said, advocating for simplifying the capital increase process and allowing some profits to be retained by the company.
He concluded by suggesting that when quality asset-holding REITs face temporary liquidity crises, the government should consider support mechanisms based on collateral.
* This article has been translated by AI.
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