Project REITs, which allow real estate investment trusts (REITs) to handle not only real estate investment but also development and operation, will be fully introduced starting this month. A REIT is an indirect investment structure that raises funds from multiple investors to invest in real estate and distributes rental and operating revenue as dividends.
According to the government on the 25th, a revision to the Enforcement Decree of the Real Estate Investment Company Act, which sets out procedures for filing establishment reports for project REITs, was approved at a Cabinet meeting on the 18th. The revised decree will take effect on the 28th of this month along with the parent law containing provisions on project REITs.
The Ministry of Land, Infrastructure and Transport moved to legislate the introduction of project REITs in response to complaints that, due to regulations, it was effectively impossible for asset management companies and others to build revenue-generating real estate such as residences and then continue through REITs to operate them.
Previous development projects, conducted mainly for sales through special purpose vehicles (PFV), had a temporary nature, being sold off and liquidated upon completion. With the introduction of project REITs, however, developers can directly hold and operate the property after development, generate continuous revenue through leasing, and open a path to share profits with investors, including the public.
The revised decree eases regulations by allowing the establishment of a project REIT through submission of only an establishment report to the Ministry of Land, Infrastructure and Transport without a business license, and it requires obtaining a business license within one year and six months after project completion to operate the property.
In addition, considering the strong demand to convert ongoing projects pursued under existing PFVs into project REITs, conversion will be permitted for six months on a temporary basis if requirements are met.
The revised decree also expands the scope of REIT development projects. It abolishes floor area thresholds, such as allowing only extensions or reconstructions exceeding 3,000 square meters, enabling small-scale projects and remodeling to be pursued as REITs.
The government plans to offer various incentives to revitalize project REITs. Starting in the second half of this year, a portion of prime land within public housing sites, including the third new towns, will be mandatorily supplied to REITs that undertake responsible operation and development.
In addition, by revising the Act on Restriction on Special Cases Concerning Taxation, the government plans to introduce a system to defer corporate taxes that were immediately imposed when landowners contribute idle urban land in kind, until the point when profits are realized.