Believed Securities Firm's "Safe" Assurance, Lost Entire Principal... The Truth Behind This Fund

Warning Issued for Overseas Real Estate Fund Investments
Financial Supervisory Service Releases Key Dispute Cases
"Ensure the Product Matches Your Investment Profile"

"Because this product invests in real estate, it is safe and there is no risk of losing your principal."

Investors who had joined overseas real estate public offering funds solely based on such assurances from securities firm employees are experiencing serious losses, such as losing their entire principal or having their dividend payments suspended. As the global real estate downturn drags on, forced sales by local financial institutions and declines in asset value due to maturity extensions are becoming a reality. On August 10, the Financial Supervisory Service urgently issued investor advisories based on major dispute case examples.

Image generated by artificial intelligence (AI) to aid understanding of the article. Gemini

For instance, an office worker, Mr. A, invested in an overseas real estate fund after hearing from an employee at securities firm B that "since the investment is in real estate, it is safe," only to lose his entire principal.

The Financial Supervisory Service reviewed the recorded call from the time and confirmed that the employee made definitive statements such as "since this invests in real estate, there is no chance of principal loss." The Financial Investment Dispute Mediation Team at the Financial Supervisory Service determined that this was a case of mis-selling in violation of the obligation to prohibit improper solicitation under the Financial Consumer Protection Act, and partially acknowledged the securities company's liability for damages.

However, cases in which financial institutions’ improper solicitation is proven and compensation is granted are extremely rare. This is because overseas real estate funds inherently have high-risk structures, meaning the entire principal can vanish even with a simple market downturn.

The Pitfalls of Leverage Structures: Losses Amplified in a Down Market

It is common for overseas real estate funds to utilize a "leverage structure," involving local institutional loans on top of investor capital. While this structure boosts returns when markets rise, it rapidly amplifies losses if asset prices fall.

In particular, under the ongoing global real estate recession, vacancy rates increase, rental income decreases, and asset values decline simultaneously, destabilizing the investment structure. If loan repayment pressure mounts, this can lead to local financial institutions exercising their collateral rights, resulting in a forced sale. The proceeds from such sales are first used to repay senior loans, and if the sale price is low, there may be no remaining funds for lower-priority fund investors, resulting in a total loss of principal.

Financial Supervisory Service. Yonhap News Agency

Dividends Halted by ‘Cash Traps’ ... No Interim Redemption in Lock-up Structures

Besides principal loss risks, the so-called "cash trap"—when rental income is not paid out to investors—also presents a serious challenge. If certain conditions occur, such as exceeding the local loan-to-value (LTV) ratio specified in credit contracts or a rise in vacancy rates, then rental income is prioritized for the lender rather than for investor dividends. As a result, dividend payments to investors can be completely halted, even if standard lease agreements continue.

Even investors in urgent need of cash are virtually unable to redeem their investments mid-term, since most overseas real estate funds are set up as "closed-end" or lock-up funds that do not permit early redemption. While some funds are listed on the securities market, liquidity is critically low, so trades might not be executed; even when trades do occur, investors often have to sell at prices far below the fund’s actual value.

In fact, regarding complaints from investors claiming they were not adequately informed about early redemption restrictions, the Financial Supervisory Service stated, "Early redemption restrictions are an inherent characteristic of real estate funds and are clearly outlined in the investment prospectus. So denying early redemption cannot be considered improper handling of business," and thus rejected these claims.

Furthermore, even after the fund reaches maturity, if the property sale or liquidation process is delayed, investors may have to wait indefinitely to retrieve their investments. Even if unitholders vote against maturity extension at a general meeting, immediate cash redemption is impossible if the fund lacks sufficient liquid assets. With market stagnation, maturity extensions become likely; during such periods, tenants may vacate properties, increasing vacancies. This can trigger a vicious cycle where asset values decline further, causing greater losses.

Proving ‘Breach of Duty to Explain’ is Difficult After Handwritten Signatures

The Financial Supervisory Service warns that if investors hand-sign a subscription application or product prospectus “confirming that they have listened to and understood the explanation,” it becomes extremely difficult to later claim damages against the seller for failing to explain product details. Handwritten signatures are legally interpreted as strong evidence that the investor voluntarily made the investment after fully understanding the key details and associated risks. Therefore, investors should not sign simply based on a sales employee’s assurances; if there is anything unclear, they must request additional explanations before signing.

Kim Kyungsoo, head of the Financial Investment Dispute Mediation Team at the Financial Supervisory Service, stressed, "Overseas real estate funds carry the possibility of total principal loss and their structure severely restricts interim redemption. These products are absolutely unsuitable for investors seeking principal protection or those managing short-term funds." The Financial Supervisory Service official added, "Going forward, we will promptly share dispute cases and cautionary points regarding financial investment products, and, if necessary, strengthen investor protection mechanisms through institutional improvements."

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