Real Estate Investors Labeled as 'Speculators'... Government Urges Indirect Investment Through Funds

Hong Nam-ki, Deputy Prime Minister for Economy, Chairs Real Estate Market Inspection Ministerial Meeting on the 2nd
Expected to Share Rental Housing and Commercial Lease Income with Investors
"Price Increase is Steep, Purchase Conditions Are Not Favorable... Quick Decision-Making Difficult Due to Public Fund Structure"
Real Estate Funds Are High-Risk 'Grade 5' Investment Products... Sales Also Challenging

[Image source=Yonhap News]

[Sejong=Asia Economy Reporters Kim Hyunjung, Jang Sehee, Moon Jewon] As the government plans to expand measures to activate public REITs and real estate funds utilizing market liquidity as part of increasing the supply of mid-sized rental housing, the market is already raising doubts about their effectiveness. Critics argue that it is contradictory for the government, which defines economic actors who profit from real estate trading or operate private rental businesses as 'market disruptors,' to now offer real estate investment opportunities.

On the 2nd, Hong Namki, Deputy Prime Minister and Minister of Economy and Finance, chaired the '11th Real Estate Market Inspection Meeting' at the Government Complex Seoul and announced plans to supply 63,000 units of "high-quality middle-class rental housing" over the next five years. He stated, "We will expand the supply of rental housing for the middle class by activating public REITs and real estate funds that utilize abundant market liquidity." He added, "By providing indirect real estate investment opportunities to many ordinary citizens and guiding market liquidity into productive sectors, we can establish a stable foundation for the rental market in the mid to long term," and "We will also strengthen necessary support such as tax benefits." Specific measures are expected to be included in the 2021 Economic Policy Direction to be released in mid-month.

◆How much will rental housing funds attract?= According to the Ministry of Economy and Finance, public REITs and real estate funds will be formed by the government directly purchasing rental housing and commercial spaces within complexes, sharing rental income with investors. However, the investment targets have not yet been selected, and it is unclear whether general investors will participate actively. Since public rental yields are fixed, questions arise about whether stable income can be guaranteed to investors. Ahn Myungsook, head of the Real Estate Investment Support Center at Woori Bank, pointed out, "With prices rising sharply and liquidity exceeding expectations, it is not easy to purchase rental housing or land, and decision-making is difficult in a fund structure."

Another issue is that real estate funds themselves are classified as high-risk products with an investment grade of '5,' making sales difficult. Ahn explained, "The funds that recently caused problems had even lower ratings," and "There are very few cases where real estate funds, domestically or internationally, have provided good experiences to investors."

Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, is delivering opening remarks at the 'Real Estate Inspection Ministers' Meeting' held on the 2nd at the Government Seoul Office in Jongno-gu, Seoul. Photo by Kang Jin-hyung aymsdream@

◆How effective are incentives?= There are also forecasts that tax incentives to attract investors will be limited. The expected tax benefit is separate taxation on dividend income from indirect real estate investments. The government expanded tax benefits for real estate REITs last year, applying a 9% tax rate on dividend income from indirect real estate investments up to 50 million KRW. The 9% rate is significantly lower than the general financial income tax rate of 14% for interest and dividends.

Academics related to the field believe that compared to direct real estate investment or other asset investments such as stocks and funds, the profitability is low, making it difficult to attract investors with such tax incentives. Professor Park Kibek of the Taxation Department at the University of Seoul said, "If investing in other assets yields higher returns, the effect of tax incentives will not be significant," adding, "Ultimately, the expected level of returns is very important." Professor Hong Woohyung of Hansung University’s Economics Department said, "If the real estate bubble starts to burst, there is a risk that the fund’s value could be cut by more than half," and "Providing benefits only to real estate funds, unlike other funds, could distort the investment market."