A red light has come on for Coupang's effort to securitize (REIT-ify) its logistics centers. Problems are emerging from the REIT licensing stage, which used to proceed smoothly as long as legal requirements were met. There are also forecasts that raising funds will not be easy. In the retail industry, some say Coupang's self-investigation and release of the personal data leak incident backfired. It means the company made an easy road hard.
According to the real estate and retail industries on the 8th, the effort to REIT-ify Coupang's three core logistics centers is increasingly likely to be delayed. Since June last year, Coupang has teamed up with Alpha Asset Management to REIT-ify the Incheon Mega Fulfillment Center (FC), North Cheonan FC, and South Daejeon FC, but the Ministry of Land, Infrastructure and Transport (MOLIT) holds the licensing authority. Coupang, which requested approval from the ministry in Dec. last year to sell the logistics centers, had expected to wrap up REIT formation work in the first half of this year.
The problem is that Coupang now appears effectively at odds with the Ministry of Land, Infrastructure and Transport (MOLIT). As Coupang took a tepid approach to the personal data leak, the government said it would form a pan-government task force (TF) to examine Coupang's labor, environmental, and fair-trade issues from multiple angles. At the Coupang hearing held at the National Assembly on the 30th, there was even talk of whether to cancel Coupang's parcel delivery service business. Under the Act on the Development of the Logistics Service Industry for Everyday Life, the government can issue improvement orders for safe delivery and worker protection for Coupang's parcel operations such as Rocket Delivery, and if they are not properly implemented, the Minister of the Ministry of Land, Infrastructure and Transport (MOLIT) can cancel the business registration.
In fact, REIT licensing is as easy as "a piece of rice cake while lying down" if you simply meet the legal requirements. That is because it is enough to meet the minimum capital requirement and place professionals in the right roles. Moreover, Coupang's logistics centers are subject to a 15-year master lease by Coupang with annual rent increases of 2.0% to 2.5%, so there should be no issues from the standpoint of the business plan or investor protection.
The real issue is how conservatively the Ministry of Land, Infrastructure and Transport (MOLIT) will judge the securitization of Coupang's logistics centers. A real estate industry source familiar with the matter said, "REIT licensing is quite an easy process, but since relations between the licensing ministry and the company are not good, I expect approval to be delayed." Kim Seung-beom, an investment system director at the Ministry of Land, Infrastructure and Transport (MOLIT), also said, "We are reviewing this in detail without simply assuming the typical timeframe for business approval."
The longer the licensing is delayed, the more Coupang's securitization plan will be pushed back. Because Coupang secured land and facilities for its logistics centers largely through borrowing fund, the longer the securitization is delayed, the more the structure inevitably incurs interest expense and other burdens.
There could also be difficulties in raising the related funds. To REIT-ify the Coupang logistics centers, about 400 billion won in investment is needed. Typically, major pension funds play this role. Domestic pension funds are formed with contributions from subscribers such as the public, government employees, and corporations, and infrastructure investments like Coupang's logistics centers are seen as stable because they can receive dividends reliably.
The problem is that pension funds' sustainable (ESG—social, environmental, and governance) investment role has been emphasized recently. While the ESG assessments of Coupang and the Coupang logistics center REIT could differ, at this stage they have no choice but to look at Coupang when making investment decisions.
Coupang's ESG score is low. According to S&P Global, Coupang's ESG score is 8 out of 100. It had been 9, but the personal data leak incident lowered it. The gap with peer retailers is also large. Amazon, known as Coupang's benchmarking target, had an ESG score of 26. Lotte Shopping and Shinsegae scored 39 and 42, respectively.
A capital market industry source said, "As ESG management at pension funds is more important than before, even if revenue is not an issue, it is a difficult phase to readily commit to an investment."
Securitizing logistics centers is an important management step for Coupang. Through this, Coupang can recoup about 1 trillion won. That does not mean Coupang is declaring an exit from the Korean market. Until now it has built logistics centers itself despite losses, but now that it has secured a strong base of consumers, it intends to lighten that load and improve capital efficiency. The funds could be used for investments in other markets such as Taiwan, or to protect investor rights. Some say part of it will be used for compensation related to the personal data leak. However, a source familiar with Coupang said, "This is not a structure in which the securitized funds will be used to fill the compensation plan." Coupang proposed a coupon compensation plan totaling 50,000 won per victim, which was little more than a consumption-boosting offer like Musinsa's unconditional New Year's promotion.
A retail industry source said, "Most of the sales of Coupang Inc. in the United States come from Korea, and there are many steps it will continue to take in Korea going forward. With an investor-first mindset, it has incurred many unnecessary difficulties." The person added, "If the board functions properly, this is also an issue on which responsibility could be sought for a faulty management decision."