Office developments using "project REITs (real estate investment trusts)" are underway in Gangnam and Seongsu in Seoul. A project REIT departs from the traditional REIT structure that purchased and operated completed properties, instead raising funds from the development stage and taking responsibility for the entire process through leasing and operation after completion.
As of the 16th, according to the Ministry of Land, Infrastructure and Transport (MOLIT) and the REITs industry, MOLIT has accepted filings for nine project REITs so far. Project REITs are being used for a range of real estate development projects, including offices, mixed-use projects, healthcare, and logistics centers.
As part of its plan to normalize troubled project financing (PF), the Ministry of Land, Infrastructure and Transport (MOLIT) introduced project REITs in Nov. last year, enabling developers with a certain level of equity capital to take responsibility for the entire real estate development process.
Under the existing real estate development model using a special purpose company (PFV), developers proceed without equity by borrowing, and generate revenue through sales after completion. This structure increases the potential for PF project distress and shifts development risk onto buyers, creating problems. The Ministry of Land, Infrastructure and Transport (MOLIT) introduced project REITs as an alternative development tool to address the structural problems of such PFVs.
Since project REITs were introduced, developments using project REITs have been emerging in the Seoul office market. According to the Ministry of Land, Infrastructure and Transport (MOLIT), Koramco Value Investment Gangnam has begun constructing an office building through a project REIT. The project will create a prime office on the Lion Sewing Machine site in Seocho-dong, Seocho-gu, with a total floor area of 64,390㎡ (about 19,500 pyeong), from six basement levels to 23 above-ground floors.
HL No. 6 Seongsu-do is also a project REIT that will build an office in Seongsu-dong, Seongdong-gu, on a 2,600㎡ site at a cost of 247.6 billion won. The filing to convert to a project REIT was made after permits were obtained but before groundbreaking. HL No. 7 Seongsu Project REIT is likewise an office development in Seongsu-dong, investing 306 billion won, and its project REIT filing was accepted before permits.
The Jemulpo Station urban complex project in Michuhol-gu, Incheon, will also be developed as a project REIT. This project, which will build and operate multifamily housing and retail, applied to convert to a project REIT at the stage after permits and at groundbreaking. The total project cost is 1.9804 trillion won.
Project REITs are expected to gain traction because they offer an investment structure that can pursue both development profit and rental revenue at the same time. While ordinary REITs focus on rental revenue from completed buildings, project REITs cover the entire process from development and operation to sale, allowing returns to expand to include sales profit and asset value appreciation, which can increase yields. Another advantage is that they can structurally diversify project risk compared to the existing PFV development method.
However, industry voices say that for project REITs to gain momentum, tougher regulations compared with the existing PFV model could become an obstacle. When development, completion, and even leasing operations are possible under a PFV structure that requires less initial capital than a project REIT, there is little incentive to switch to a project REIT, which carries heavier regulatory burdens such as public offerings, disclosures, and supervision after completion. PFVs have no borrowing limits and no reporting or disclosure obligations. In contrast, project REITs have a borrowing cap of up to twice their equity capital and are subject to reporting and disclosure obligations. In addition, after development is completed, a project REIT must obtain a business license within 18 months, convert to a general REIT, and proceed with a public offering to investors.
A REITs industry official said, "There is currently no guarantee that converting a development project into a project REIT will yield greater revenue. Instead, regulations have become stricter than before, so we need to run more numbers on whether to convert," adding, "Because a project REIT also has to consider a public REIT, we likely need to assess development and rental revenue in aggregate."
Another industry official said, "We started with expectations, but at the moment we have not found what advantages there are from an operations standpoint compared with a PFV," adding, "It is because the initial equity required is much larger than for a PFV, and in terms of operations such as disclosures, there can be much more external involvement." The official continued, "However, the current development market itself is weak, so it is difficult to evaluate project REITs perfectly," adding, "Since the government is committed, we expect there will be institutional improvements."