Real estate investment trusts (REITs) that invest in overseas real estate can now autonomously determine their hedge ratio. A hedge refers to fixing the exchange rate at the time of the hedge contract to prepare for asset price fluctuations due to exchange rate changes. However, existing listed REITs are expected to maintain the current hedge ratio considering the contractual terms set at the initial fund establishment.

According to the REITs industry on the 12th, authorities recently informed the Korea REITs Association and asset management companies that they would allow the hedge ratio to be determined autonomously within the scope that does not hinder investor protection. An industry official noted, “After identifying the current status following the issue of the hedge settlement amount, it was concluded to acknowledge the industry's autonomy.”

Illustration=ChatGPT DALL-E 3
Illustration=ChatGPT DALL-E 3

There was no compulsory regulation on the hedge ratio for domestic REITs investing in overseas real estate. Authorities have only recommended a hedge ratio of 100% when granting establishment approval, considering the long-term investment characteristics of REITs. The industry has effectively accepted this as a requirement. Most listed REITs, except for Mirae Asset Global REIT, have entered into hedge contracts amounting to 100% of the principal of the REIT.

However, issues arose as the value of the Korean won sharply declined and multiple hedge contracts reached maturity. REITs must pay the hedge settlement amount to the counterparties, such as banks, in accordance with the current exchange rate, which has risen compared to the reference rate at the time of the hedge contract's maturity.

Since REITs have mostly used cash for dividend resources, they now find themselves in situations where they must either borrow additional money or sell part of their holdings to secure additional hedge settlement amounts.

The burden of the hedge settlement amount has led to a decline in the stock prices of listed REITs amid an already challenging overseas office market. Over the past three months, Shinhan Global Active REIT's stock price dropped by 23.3%. JR Global REIT and KB Star REIT saw their stock prices fall by 13.3% and 7.5%, respectively.

As the hedge ratio does not need to be set at 100% when designing REITs, it is expected that products exposed to exchange rates will emerge in the future. Although the risks may increase due to fluctuations in exchange rates, the costs of hedging could potentially be utilized as additional revenue from dividends.

However, existing REITs are expected to find it difficult to adjust their hedge ratios. The hedge ratio is stipulated in the borrowing agreements for real estate purchases, and changing it would essentially require establishing a new fund.

An official from an asset management company noted, “It is impossible to adjust the hedge ratio of existing REITs due to the numerous stakeholders,” adding that “variety will increase with new products.”