Ritz Transitions to Pre-Management System... Announces First Half Reform Plan

The Ministry of Land, Infrastructure and Transport announced on the 18th that it will review the current management and supervision system for real estate investment trusts (REITs) to effectively protect investors and reduce the burden on REIT companies, with plans to establish measures within the first half of this year.

Ministry of Land, Infrastructure and Transport / Photo by Hyunmin Kim kimhyun81@

REITs, a type of indirect real estate investment product, pool funds from investors to invest in domestic and overseas real estate, then regularly distribute profits such as rental income or capital gains from sales. As of the end of March this year, 354 REITs are operating in Korea, with assets exceeding 90 trillion won. Among these, 22 are listed REITs.

REITs have achieved not only quantitative growth but also qualitative growth, including diversification of investment targets and expansion of overseas asset investments. However, the current REIT management and supervision system has been criticized for failing to keep up with changes in the REIT market, focusing mainly on formal inspections and post-violation penalties.

For example, REIT company staff repeatedly fail to comply with complex and diverse disclosure and reporting obligations under the Real Estate Investment Company Act, which is pointed out during every REIT inspection. Additionally, when investigations are requested for legal violations subject to criminal penalties, investigative agencies often decide not to prosecute, citing rigid interpretations without considering the degree of violation.

In response, the Ministry of Land, Infrastructure and Transport has decided to shift the management and supervision system from a post-violation approach to a preemptive one. This includes distributing REIT operation manuals, providing prior guidance on disclosure and reporting requirements, and establishing channels for legal interpretation and violation case inquiries. Comprehensive inspections will be replaced by selective inspections focusing on important matters to ensure substantive examinations. On-site inspections will focus on issues directly related to investor protection, and disclosure and reporting requirements will be simplified. The penalty system will also be rationalized by considering the severity of current criminal penalties, with minor violations potentially converted to fines.

To support this system reform, a 'Public-Private Joint Task Force (TF) for REIT Management and Supervision System Reform' will be formed. The TF will hold its first meeting at 2 p.m. today at the Korea REITs Association in Yeouido, Seoul. The TF will include the Ministry’s relevant departments, private experts in law, accounting, and finance, as well as industry representatives such as the REITs Association, and will actively incorporate investor opinions during discussions.

Nam Young-woo, Director of Land Policy at the Ministry of Land, Infrastructure and Transport, stated, "As the REIT market grows quantitatively and investment targets diversify, the current management and supervision method centered on budget and manpower input is inefficient. Based on the TF discussions, we will announce a plan to reform the REIT management and supervision system within the first half of the year, and we also plan to promptly integrate the currently advanced REIT information system into REIT management and supervision tasks."