The key to improving the project financing (PF) system is to reduce business risk through 'project REITs', which can handle both development and operation.
Kim Seung-beom, director of the Ministry of Land, Infrastructure and Transport, noted on the 20th at a breakfast seminar of the Seoul Real Estate Forum held at the JW Marriott Hotel Seoul in Banpo-dong, Seocho-gu, Seoul, that he made these remarks during a lecture on 'real estate trends in REITs and PF.'
Project REITs involve real estate investment companies (REITs) directly developing and leasing real estate. They are characterized by being subject to a registration system rather than a permit system during the development phase, and having minimal disclosure and reporting obligations, which reduces the concerns of project delays. The government announced measures to revitalize REITs last June and is promoting the introduction of project REITs.
Currently, the domestic real estate PF market tends to be exposed to risks as developers engage in development projects with little capital. Director Kim diagnosed the current market, stating, "Domestic developers wish to maximize profits using leverage with a low equity ratio, while institutional investors (LPs), such as pension funds and mutual aid associations, are hesitant to invest in equity due to low trust in developers."
Furthermore, Director Kim explained, "The equity ratio of developers in PF projects in our country is very low compared to other developed countries, while in the U.S., the equity ratio is about 33%, of which only about 10% is raised by developers, and LPs, such as pension funds and mutual aid associations, invest substantial capital, allowing them to continue projects stably."
To address the problem of PF insolvency, the need for introducing 'project REITs' is essential, according to Director Kim. He explained, "In the development phase, we aim to facilitate development like a project finance investment company (PFV), and after completion, to stabilize recruitment of tenants before issuing public offerings, followed by imposing regulations. Thus, we decided to push for the introduction of project REITs, considering that PFVs face relatively fewer regulations than REITs under the Restriction of Special Taxation Act, making development easier."
Director Kim stated the plan to provide public land purchase priorities to REITs with stable equity, enabling them to support stable development and operation.
He said, "Public lands, such as those from the Korea Land and Housing Corporation (LH), typically have a structure where developers receive land to develop offices and commercial spaces for sale to individuals, yet the key to this PF system improvement bill is to offer the best land to developers who handle both development and operation."
The government plans to detail a system this year that allows for tax deferral on land and other in-kind contributions until the operational stage when project REITs are involved. Additionally, they are considering methods to integrate high-quality real estate constructed under project REITs with community cooperative REITs, granting specific local residents priority to subscribe to REIT shares.
The Seoul Real Estate Forum is a purely non-profit organization made up of opinion leaders from the real estate development, finance, marketing, and asset management sectors, along with professors related to real estate and experts in law, accounting, and appraisal. Currently, the forum has about 200 active members.