REIT Industry CEOs Urge Urgent Systemic Reforms to Prevent "Insolvency Despite Profitability" in Joint Petition [Real Estate AtoZ]

Listed REIT Market Shaken by JR Incident

"Need for Liquidity Safeguards Like in the US and Japan

Delayed Capital Increases and Restrictions on Retained Earnings Worsen the Crisis"

CEOs of REITs have made a joint appeal to save the market, which is facing the risk of insolvency despite holding high-quality assets, due to institutional limitations.

The Korea REITs Association announced on the 11th that, together with the heads of REIT management companies, it had recently submitted a petition to the National Assembly and the government, urging stabilization of the REITs (Real Estate Investment Trusts) market and institutional reforms. The association stated that the market instability revealed by the JR Global REIT incident is not a problem specific to one company but is rooted in systemic limitations, and called for measures including legal amendments.

A panoramic view of the Finance Tower Complex in Brussels, Belgium, a major investment asset of JR Global REITs. JR Global REITs

The association argued that, as in major countries overseas, there needs to be an institutional safety net in place in case REITs holding quality assets encounter temporary liquidity crises. In the United States, REITs can retain cash through stock dividends, and in Japan, the central bank purchases J-REITs. Similarly, the association called for a liquidity support system for high-quality REITs in Korea.

Specifically, they proposed that the Housing and Urban Fund invest in anchor REITs to support corporate bond purchases, and allow companies to retain part of the capital gains from asset sales. They also requested revisions to regulations that impose criminal penalties for failing to distribute over 90% of profits as dividends, and to streamline the capital increase process, which currently takes several months.

The industry explains that, due to lengthy procedures such as requiring approval from the Ministry of Land, Infrastructure and Transport, it currently takes four to six months to actually secure funding. As a result, REITs have had to rely on short-term corporate bonds, leaving them highly vulnerable in the event of interest rate hikes or a credit crunch. The industry has also proposed switching from an approval-based to a notification-based system, or adopting a fast-track capital increase system modeled after those in major developed countries, which would allow completion within one month.

The backdrop to these demands is the JR Global REIT incident.

REITs are indirect real estate investment products that pool funds from multiple investors to invest in properties such as offices, commercial facilities, and logistics centers, distributing rental income as dividends. Since the enactment of the Real Estate Investment Company Act in 2001, the sector has continued to grow, and as of last month, there were 463 managed REITs, 400,000 investors, and assets totaling approximately 123.4 trillion won.

However, the mood changed dramatically when JR Global REIT, Korea's first overseas investment listed public REIT, failed to repay 40 billion won in short-term bonds and filed for corporate rehabilitation with the Seoul Bankruptcy Court. This marked the first default by a listed REIT. Following the incident, REIT stock prices plummeted and concerns over a credit crunch increased, shaking the entire market.

The association claims that JR Global REIT is a case of so-called "insolvency despite profitability," having high-quality assets but falling into a temporary cash crunch. According to the association, JR Global REIT owns the Finance Tower, an office building leased by the Belgian government until 2034, with net rental income over the next eight years expected to reach about 650 billion won.

The association stated, "There was undue interference from overseas creditors during the activation of a cash trap on the Belgian asset," adding that related litigation is ongoing locally. A cash trap is a mechanism that restricts the use of cash generated from rental income for dividends or new investments, requiring it to be used first to repay debts. The association explained that, due to this measure, local rental income could not be remitted to Korea, ultimately leading JR Global REIT to default on its domestic short-term bonds.

The industry is concerned that if the situation drags on, it could lead to a fire sale of assets, causing capital outflow and affecting approximately 30,000 investors. In fact, according to the industry, the total amount of corporate bonds issued by REITs is about 3 trillion won, with bonds worth 1.15 trillion won maturing by the end of the year. The association further explained that, following the JR Global REIT incident, the average share price of listed REITs fell by 20.6% in just over a month, and financial institutions are also moving to raise lending rates. As interest burdens increase, dividend capacity declines and market confidence may weaken further. The association warned, "If the overall confidence in the REIT market falls and an imminent phase of rising interest rates coincides, the market could collapse, resulting in massive losses for numerous investors and capital flight."

This content was produced with the assistance of AI translation services.