Relaxation to 20% Stake in REITs Real Estate Corporations... Development of Healthcare REITs

"Responding to Interest Rate Hikes and Real Estate Market Downturn"
CP Issuance Allowed... Relaxation of Approval Cancellation Rules
Advancing Timing of Daeto REITs Equity Transactions

Ministry of Land, Infrastructure and Transport / Photo by Hyunmin Kim kimhyun81@

[Asia Economy Reporter Noh Kyung-jo] A new model for REITs (Real Estate Investment Trusts) will be developed, and fundraising through the issuance of commercial paper (CP) will be permitted. Additionally, even if a REIT owns only 20% of the shares of a real estate corporation, this investment stake will be recognized as real estate assets. The cancellation of licenses for REITs and Asset Management Companies (AMCs) will be determined by considering the degree of intent or negligence.

On the 5th, the Ministry of Land, Infrastructure and Transport announced the "REITs System Improvement Plan" containing these measures. This plan was prepared to alleviate the industry's burden as REITs have faced difficulties in fundraising due to the recent rapid interest rate hikes and worsening market conditions caused by declining investor interest.

First, the diversity of REIT investment assets, which are concentrated in housing (51.0%) and offices (25.9%), will be secured. The ministry plans to actively support healthcare REITs, homeownership REITs, and REIT-type urban complex development projects through public-private cooperation. This is to prevent the entire REIT market from being affected when the real estate market in a specific sector declines.

Issuance of CP will also be allowed as a method of REIT fundraising through borrowing. Currently, only financial loans and corporate bond issuance are possible, but there is a judgment that these have limitations in flexible market response. A ministry official said, "Issuance of CP requires a credit rating of B or higher from two or more credit rating agencies, so the possibility of investor protection issues is low," adding, "We plan to discourage indiscriminate issuance by requiring prior consultation with the ministry."

Excess dividends using depreciation expenses are currently allowed only when REITs invest directly in physical real estate, but going forward, indirect investment REITs will be allowed in a limited manner considering shareholding ratios and investment structures. When acquiring or disposing of fund beneficiary certificates rather than real estate, regulations will be improved to submit a fair value appraisal report instead of a due diligence report (which requires an appraisal).

The scope of real estate recognition among REIT assets will also be expanded. Current regulations on REIT assets recognize investment stakes as real estate only when a REIT owns more than 50% of the shares of a real estate corporation (a corporation with more than 80% of total assets in real estate). This has been criticized for hindering diversification of REIT revenue structures and portfolio expansion.

The ministry decided to recognize investment stakes as real estate even when a REIT owns 20% or more of the shares of a real estate corporation. This is the minimum standard for securing influence. According to Chapter 8 of the Corporate Accounting Standards on the equity method, if an investor holds 20% or more of the voting shares of the investee company, the investment company is recognized as having "significant influence."

The preliminary approval process for AMC establishment will be replaced by prior review by the Korea REITs Association. This is because the subsequent establishment approval (which confirms compliance with preliminary approval requirements) examines essentially the same conditions, leading to inefficiency.

The timing for disposal of shares received by land compensation recipients who contribute in-kind to land compensation REITs will be improved to allow disposal approximately 1 to 2 years later. Currently, regardless of the contribution timing to the REIT, disposal is allowed only after 3 years from the compensation contract date, which lacks incentives for early contribution to land compensation REITs and delays securing investment assets.

Furthermore, the ministry will reorganize the inspection system for REITs and AMCs in the first half of the year based on the three principles of guidance, substance, and selective concentration, and will also relax license cancellation regulations. For example, even if personnel are temporarily unavailable due to employee leave, licenses are currently canceled for not meeting requirements. However, going forward, license cancellation will be decided by considering the degree of intent or negligence.

In addition, the ministry will establish the legal basis for the "REITs Disposal Advisory Committee" and ensure that subscription information for listed REITs is provided in a timely manner through the REITs information system operated since 2016.

Nam Young-woo, Director of Land Policy at the Ministry of Land, Infrastructure and Transport, said, "We will promote timely regulatory improvements to help the REITs market recover from difficulties caused by high interest rates and real estate market downturns, ensuring that this useful indirect real estate investment tool for the public is maintained soundly."

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