80 Trillion Won REITs Market... Growth Wings with Regulatory Easing

Relaxation of REIT Asset Requirements... New Enforcement Decree Effective from the 9th

The Ministry of Land, Infrastructure and Transport announced on the 8th that the new Enforcement Decree of the Real Estate Investment Company Act, which focuses on improving regulations on Real Estate Investment Trusts (REITs) and Asset Management Companies (AMCs), will be applied from the 9th.

REITs are indirect real estate investment entities that take the form of joint-stock companies, pooling funds from multiple investors to invest in real estate and return profits. Asset Management Companies are entities entrusted with the investment and management of assets from REITs.

First, regulations related to rental deposit guarantees for rental housing REITs will be improved. REITs must have at least 70% of their assets composed of real estate rather than cash or equivalents, but going forward, cash inflows from rental deposits will be excluded from this regulation.

In the case of rental housing REITs, some of the deposits received from renting out housing are held in cash, and temporarily high proportions of such cash inflows can lead to violations of the '70% rule.'

In fact, during the Ministry of Land, Infrastructure and Transport’s continuous monitoring in the second half of 2020, six rental REITs were found to have violated this regulation. Violating the '70% rule' can result in cancellation of business authorization or criminal penalties.

The Ministry explained that rental deposits inevitably occur during the operation of rental housing REITs and are assets expected to be returned to tenants in the future, so exceptions will be recognized.

Regarding AMCs, the regulation that cancels authorization if the capital stock requirement (7 billion KRW) is not met will be improved.

From now on, even if the capital stock requirement is not met, exceptions will be recognized if it is within two years after establishment authorization or if the capital stock requirement has not been unmet for two consecutive years.

This is in response to criticism that the current regulation treats cases where capital stock is insufficient due to early business stages or temporary performance deterioration as grounds for cancellation without exception, which could lead to investor damage in entrusted REITs.

Additionally, the scope of public investors exempt from the REITs’ public offering obligation will include the Correctional Service Mutual Aid Association. Currently, pension funds such as the National Pension Service and the Military Mutual Aid Association, which invest in REITs, are recognized for their public nature and benefit from several relaxed regulations. However, the Correctional Service Mutual Aid Association, established by the Correctional Service Mutual Aid Act enacted in 2015, was not subject to these benefits, restricting its REIT investments.

Jin Hyun-hwan, Director of Land Policy at the Ministry of Land, Infrastructure and Transport, said, "As the REITs market has rapidly grown recently, with 325 REITs operating as of the end of last month and assets totaling about 79 trillion KRW, we will actively review whether there are any unreasonable regulations that hinder investor protection and industry development and continue to improve them."

This content was produced with the assistance of AI translation services.