REITs seek paradigm shift in real estate investment

Alpha Dome City in Pangyo, Gyeonggi Province. Shinhan Alpha REITs invest in these office buildings which will have the country's top IT and game companies as tenants. / Courtesy of Shinhan REITs Management

By Yoon Ja-young

Many Koreans are obsessed with buying an apartment, which has led to problems such as speculation, soaring housing prices and household debt. This has prompted the current administration to strengthen regulations and increase taxes, which have made apartments a less attractive investment as of late. People therefore may look at investing in real estate investment trusts (REITs) instead, to diversify their portfolio and get a relatively high investment return for low risk.

REITs are a type of security that invests in real estate. Some of them are traded on the stock market, which means anyone can easily make an investment and later convert that into cash. The investors will have a stake in assets held by the REITs, such as buildings, apartments and hotels. The REITs get rent from the tenants on top of enjoying capital gains when the value of the real estate rises. These are returned to investors as dividends.

"Unlike corporate stock investment which seeks high-risk, high-return, REITs offer mid-risk, mid-return. Anyone can indirectly invest in real estate through REITs listed on the stock market," said Jung Yong-sun, president of the Korea Association of Real Estate Investment Trusts.

REITs were introduced in Korea in 2001 to facilitate the purchase of real estate owned by conglomerates that went bankrupt following the Asian financial crisis. Between 1997 and 2001, foreign investors bought around 30 major office buildings in Seoul at bargain prices as local investors could not afford them. Following the introduction of REITs, however, numerous individuals could make a fund to invest in huge office buildings, hotels, or shopping malls. With only a few dollars, a person could acquire ownership of a skyscraper.

E KOCREF CR-REIT, which was listed on the bourse last month, for instance, invests in three commercial facilities rented by E Land Retail. They are New Core Outlet Yatap Store in Seongnam in Gyeonggi Province and two more outlets in Ilsan and Pyeongchon. The REIT gets rent from E Land Retail, which operates the outlet. The outlet in Yatap is among the top performing outlets operated by E Land Retail. It has the Yatap Subway Station nearby which sees 82,573 passengers daily, as well as 130,000 residents within a 2 kilometer radius. According to E KOCREF CR-REIT, the investment return is expected to be an average 7.2 percent annually.

"As REITs are not widely known in Korea, investors seem to see them as ordinary stock. We believe the price will rise on the bourse as more investors understand the mechanism and seek stable dividends offered by REITs," a spokesman for E KOCREF CR-REIT said.

Shinhan Alpha REITs, meanwhile, has Alpha Dome City in Pangyo, Gyeonggi Province, in its portfolio. The building is soon to open, and the REITs are scheduled to debut on the bourse next month. The huge office building has the country's top portal operator Naver, game developer Blue Hole, and Naver's affiliate Snow as its tenants.

"This building is located at the center of Pangyo which will lead Korea's Fourth Industrial Revolution. All the offices in the building are already reserved by tenants," said Namkoong Hoon, CEO of Shinhan REITs Management which operates the Shinhan Alpha REITs.

It expects around a 7 percent investment return from rents, which are set to rise by 2.5 percent every year.

According to CBRE Korea, a real estate consulting firm, the outlook is positive for office buildings in Pangyo.

"Thanks to government's development plan and improvement of infrastructure, Pangyo has risen as a new key business district," it noted in a report.

"As huge development projects such as the Techno Valley II are going on, the growth of the Pangyo office market is expected to continue," it added.

With the government plan to nurture Pangyo into Korea's Silicon Valley, leading IT and game companies are moving there, and the vacancy rate stands in the 1 percent range.

The government acknowledges that REITs need further promotion. While indirect investment into real estate through REITs or real estate funds rose steeply during the past 10 years, most of the fruits were taken by private equity funds or institutional investors as small investors here aren't familiar with the investment tool. This contrasts with Japan, Singapore and Hong Kong which also introduced REITs in the early 2000s. Publicly traded REITs amount to 93 trillion won in Japan, while the market stands at a mere 100 billion won in Korea. Most REITs in Korea invest in only one real estate asset, while REITs in other countries often have multiple buildings in their portfolio.

The government plans to promote REITs, easing regulations while assessing their credit rating so that more investors can approach the products.

"The government is preparing to announce REITs promotion plans in September. It aims at inducing real estate investment, which is currently concentrated on housing, to the non-housing sector. REITs will become a stable income source for those who are retired," said Kim Joong-han, an official in charge of REITs at the land ministry.