To shift household assets concentrated in real estate to the capital market, a proposal has been made to reduce the proportion of real estate holdings from approximately 65% to 50% over the next decade, while increasing the share of financial investment products to 20%. This includes providing tax incentives for long-term investments and enhancing the capital market's ability to allocate funds to innovative companies and strategic industries.
The Capital Market Research Institute held a conference on the role of the capital market in productive financial transformation on September 18 at the Conrad Hotel in Yeouido, Seoul, marking its 29th anniversary. Key topics discussed included improvements to financial taxation, the role of finance in an economy centered on intangible assets, and the structure of venture investments in strategic industries between South Korea and the United States.
In the first presentation, Senior Research Fellow Lee Hyo-seop analyzed the concentration of household assets in real estate from the perspective of after-tax returns. Over the past 20 years, the average annual after-tax return, accounting for property taxes, capital gains taxes, and transaction taxes, was highest for real estate in Seoul at 11.6%, followed by national real estate at 7.2%, the U.S. S&P 500 at 7.1%, the KOSPI at 6.0%, public funds at 5.7%, and equity-linked securities (ELS) at 2.1%.
Lee noted that the historical concentration of about 65% of household assets in real estate was a rational choice considering returns and risks. Applying an optimal asset allocation model, the appropriate holding proportion for real estate was calculated at 67.1%. Currently, the actual portfolio of South Korean households consists of 64.5% real estate, 16.4% cash and deposits, 10.3% insurance and pensions, and 8.5% financial investments.
However, to transition to productive finance, it is essential to move funds concentrated in real estate to the capital market. Lee proposed a target of reducing the proportion of real estate holdings to about 50% and increasing the share of financial investment products from 8.5% to 20% over the next decade.
To achieve this, the research team suggested the need to consider a phased normalization of real estate holding taxes, expanding tax benefits for Individual Savings Accounts (ISAs), and introducing an advanced financial investment taxation system that includes loss carryforward deductions. They also proposed expanding the scope of separate taxation for dividend income from domestic stocks and providing tax incentives for long-term holdings. To reduce tax disparities between products, they recommended applying the principle of 'same asset, same tax' and integrating tax-advantaged products into a single account in the medium to long term.
The capital market's price discovery function was also identified as a key issue for productive finance. Senior Research Fellow Kim Jun-seok analyzed that for capital costs to decrease and investment capacity to expand, information about a company's future profitability and growth prospects must be accurately reflected in stock prices. He also suggested that managers could improve investment decision-making by learning from stock prices, which aggregate investor information.
Comparing listed companies in South Korea, the United States, and Japan, it was found that in the U.S., these 'funding pathways' and 'manager learning pathways' operate effectively, while in South Korea, both pathways are not clearly functioning. In particular, while the funding pathway and the efficiency of research and development (R&D) investments were confirmed in large listed companies, both pathways were found to be ineffective in small and medium-sized listed companies.
As the industrial structure shifts toward intangible assets, the financial system must also adapt accordingly. Research Fellow Jeong Hee-cheol noted that intangible assets such as knowledge, brand, and organizational capabilities are becoming key elements of corporate competitiveness and productivity. However, companies heavily reliant on intangible assets face significant information asymmetry and low collateral capacity, which may restrict their access to external funding.
To connect companies' intangible value and growth potential with finance, it is necessary to strengthen financial intermediation capabilities and expand the foundation for long-term risk capital supply. Improving the information environment related to intangible assets is essential to ensure that funds flow to high-productivity companies and promising investment opportunities.
In strategic industries, the 'mid-to-late stage investment gap' was identified as a key issue. Research Fellow Kim Jin-young analyzed that deep-tech startups often face a 'valley of death' between technology development and commercialization due to long development cycles, high risks of technological failure, and significant capital requirements.
Notably, venture investments in South Korea's strategic industries are concentrated in the early stages, with lower conversion rates for mid-to-late stage follow-up investments compared to the U.S. While the U.S. has developed a collaborative investment network led by large venture capital firms in the later stages, such connections are relatively weak in South Korea. Kim suggested nurturing 'hub VCs' to lead mid-to-late stage investments and expanding participation from various investors.
During the subsequent panel discussion, there were calls to establish a virtuous cycle structure that not only supplies funds but also leads to the recovery and reinvestment of investment capital. Kang Shin-woo, CEO of Stick Investment, emphasized that the exit routes for domestic growth companies are overly focused on initial public offerings (IPOs) and that it is necessary to diversify exit routes by promoting mergers and acquisitions (M&A).
Lee Gi-baek, head of the policy and business division at the Korea Venture Capital Association, stressed the importance of a virtuous cycle where venture companies grow, recover investments through platforms like KOSDAQ, and reinvest recovered funds into new companies. He also suggested the need to scale up venture funds and extend their maturity to increase follow-up investments in growth companies.
* This article has been translated by AI.
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