Korea's REITs industry sent an official appeal to the government and political parties, asking them to prevent a credit crunch in the market and improve the system.
The Korea REITs Association said on the 10th that, together with REITs industry executives, it simultaneously delivered a petition to key stakeholders—including the ruling and opposition parties' policy committees, the Ministry of Economy and Finance, the Ministry of Land, Infrastructure and Transport, the Financial Services Commission, and the Financial Supervisory Service—urging measures to stabilize the REITs market.
The association said that after JR Global REIT, the country's first overseas-investment listed REIT, failed to repay a commercial paper on Apr. 27 and filed for corporate rehabilitation and the Autonomous Restructuring Support (ARS) program with the court, the entire market has been suffering from a plunge in stock prices and a funding squeeze.
With a large REIT with capital of 1 trillion won wavering, about 30,000 individual investors are at a critical juncture of facing asset losses worth hundreds of billions of won, a situation that could lead to the most severe damage in the history of Korea's REITs, the association said.
In particular, the industry views this crisis as a textbook case of a "black-ink bankruptcy," where the REIT's asset value exceeds its debt but a temporary liquidity shortage drives it to the brink of default. It argues that unfair interference by foreign creditors lay behind the activation of a "cash trap" clause in Belgium, where the asset is held, which freezes contractually earned funds for creditor protection. A lawsuit is currently underway there.
The association cited rigid institutional limits as the cause of the crisis. It said that the existing rights offering listing process is so complex that it takes months, during which stock prices can sink, and that in trying to avoid this, REITs became overly reliant on short-term corporate bonds.
In fact, the outstanding issuance of corporate bonds in the REITs sector is approaching 3 trillion won, with maturities due this year alone amounting to hundreds of billions of won. To make matters worse, pressure from financial institutions to raise lending rates and an average stock price drop of more than 20% in a month have combined to batter listed REITs' dividend capacity and external credibility. The industry warned that if a similar default crisis recurs and the market collapses, it could lead not only to large-scale investor damage but also to capital outflows.
Accordingly, the association asked the government to build a liquidity firewall to back sound REITs, as in the United States and Japan. Specifically, it proposed allowing the housing & urban fund to invest up to 300 billion won annually in an anchor REIT, and enabling that anchor REIT to buy not only convertible bonds but also ordinary corporate bonds. It also recommended allowing a reinvestment reserve system so that a portion of profits remaining after asset sales can be retained in-house, and abolishing the criminal penalty provision applied when the dividend payout ratio falls short of 90%.
On the cumbersome capital increase process, it called for replacing the current approval system with a filing system or introducing a fast-track that would complete all steps within a month. It also asked to allow third-party allotments for rights offerings when needed for management and to change the reference date for new share issue pricing from the subscription date to the board resolution date to block stock price downside risk.
In the petition, the association reiterated examples of advanced economies supporting REITs at the national level and nurturing them as a "national retirement security product." It appealed that a smooth resolution of the JR Global REIT case and broad institutional reform are urgent to protect the public interest value of REITs in a super-aged society and the assets of numerous retail investors.