Funds with real estate as the underlying asset can also face full principal losses or delays in the return of investment, so investors should be cautious. The financial authorities said investors should not judge something as a safe asset just because it involves real estate, and provided guidance on precautions for investors.
On the 10th, the Financial Supervisory Service said this in its "Guidance on major dispute cases and investor precautions related to overseas real estate public offering funds."
The Financial Supervisory Service (FSS) emphasized that investors should not assume something is a safe asset just because the investment target is real estate. Overseas real estate funds commonly use a leveraged structure in which they purchase properties with loans from local financial institutions. If the loan is not repaid by the maturity of the senior loan, the collateral can be exercised and the property may be forcibly sold. In this case, even a slight drop in property prices can lead to a total loss of principal.
There is also a risk that dividend payments will be suspended. That is because, under local loan covenants, a "cash trap" may apply in which rental income is allocated to the lender ahead of investors. A cash trap can be triggered when certain events occur, such as exceeding the loan-to-value (LTV) ratio or rising vacancy rates.
Investors should also note that it may be difficult to redeem funds midway. Most real estate funds are non-redeemable funds that restrict redemptions until maturity.
Redemption may be delayed even after the fund matures. If the sale of the property or the liquidation process is delayed, payment of redemption proceeds may be later than initially expected. Even if investors oppose a maturity extension at a beneficiaries' meeting and request redemption, if there are insufficient funds to pay, redemption may be delayed.
The Financial Supervisory Service (FSS) said, "These are products where a total loss of principal is possible and mid-term redemptions are restricted," and urged, "Even if a sales employee recommends them, you should decide whether to subscribe only after checking for yourself your investment horizon and the level of loss you can tolerate."