[Practical Finance] Is Small-Scale Real Estate Investment Possible Amid Soaring House Prices and Tightened Loan Restrictions?

Number of Approved REITs in Korea Reaches 260 as of End-May with Total Assets of 52.6 Trillion KRW... 62% Invested in Housing
Last Year's Dividend Yield 9.43%... Highest in the Past 3 Years
Increase in Listed Public REITs Enhances Accessibility for Individual Investors
Over 10 REITs Worth 2 Trillion KRW Expected to Be Newly Listed in Second Half of the Year

[Asia Economy Reporter Donghyun Choi] "House prices are in the hundreds of millions to billions of won, and loans are hard to get, so real estate investment is just a dream."

This is a common complaint whenever real estate investment talk comes up. With prices soaring day by day, it is difficult to even buy a single house, so investing in real estate with spare money is almost unimaginable. However, it is not entirely impossible. REITs (Real Estate Investment Trusts), which allow investment in real estate with small amounts of money, are an alternative. Especially recently, with ultra-low interest rates in the 0% range and the spread of untact (non-face-to-face) culture due to COVID-19, a new wave is blowing through REITs.

A REIT is a real estate indirect investment vehicle that collects funds from multiple investors to invest in real estate-related assets and distributes the profits to investors as dividends. According to the Ministry of Land, Infrastructure and Transport, as of the end of May, there are 260 approved REITs in Korea (excluding listed REITs) with total assets of 52.6 trillion won. Compared to 2010, when there were 50 REITs with assets totaling 7.6 trillion won, this represents a sevenfold increase in 10 years.

By type, 'Entrusted Management REITs,' which delegate asset investment and management to specialized asset management companies, account for 48.2 trillion won or 91.6% of total assets. 'CR REITs,' which operate by purchasing real estate for corporate restructuring and then re-leasing it to generate income, make up 7.47%, and 'Self-Managed REITs,' which have full-time employees such as asset management professionals who directly perform investment and management of assets like real estate, account for 0.91%.

Looking at the types of real estate REITs invest in, housing accounts for 32.5 trillion won or 61.85%. This is followed by offices (11.8%), retail (5.6%), and mixed-use (1.5%) in order of investment scale.

What about returns? REITs are required to distribute at least 90% of their distributable profits to shareholders annually. Last year, the dividend yield of REITs (excluding rental housing) was 9.43%, the highest in the past three years, supported by the rising real estate market. In particular, investment returns in the hotel (16.91%), housing (16.01%), and retail (13.39%) sectors exceeded 10%.

Most REITs operate as unlisted private funds, so access for individual investors is not easy. However, since the government introduced measures to revitalize public REITs in September last year, the number of listed public REITs has increased, greatly improving accessibility for individual investors. Currently, there are seven REITs listed on the stock market with a scale of 3.3 trillion won.

In the second half of this year, about 10 more REITs are scheduled to be listed, estimated at around 2 trillion won. Especially, due to the impact of COVID-19 and the Fourth Industrial Revolution, REITs are expected to diversify from portfolios focused on commercial real estate to investment products incorporating various real estate assets such as rental apartments, logistics centers, and gas stations.

Korea's first rental housing-based REIT, 'Aegis Residence REIT,' recently recorded a competition rate of 76.2 to 1 in its demand forecast. From the 6th to the 8th, public subscription for general investors is underway. This REIT plans to invest in 3,578 private rental housing units out of 5,678 units of 'Bupyeong The Sharp,' developed by POSCO Construction through the redevelopment project of Sipjeong 2 District in Bupyeong-gu, Incheon. In addition, new products incorporating real estate related to industries such as delivery and IT, which have expanded due to the spread of untact culture, are also about to launch.

Experts predict that REITs will firmly establish themselves as a reliable real estate investment tool due to government policies to revitalize REITs, including tax benefits, and the low-interest-rate environment.

Yeolmae Kim, a researcher at Eugene Investment & Securities, said, "With global benchmark interest rates significantly lowered, REITs will become more attractive compared to other asset classes," adding, "As COVID-19 stabilizes, dividend yields will gain attention." Minjae Lee, a researcher at NH Investment & Securities, also explained, "Considering various tax benefits, REITs are more attractive than high-interest deposit products," and "Looking at the products scheduled for listing in the second half, they are generally located in key areas expected to experience excess appreciation in asset value in the mid to long term, increasing their investment appeal."