[Untrustworthy Large Corporation REITs]② Concerns Over 'Empty Shells' Lacking Prime Assets... Need to Examine Real Estate Composition

Only Lotte Department Store Gangnam Branch is a prime asset in Lotte REITs
Hanwha REITs' included assets do not have 63 Square, Janggyo-dong Hanwha Building, etc.
Naver, GS Group, Shinsegae Group, Hyundai Motor Group also candidates for large corporate-sponsored REITs

Editor's NoteThere is an easy way to become a building owner of a large corporation's office building. It is by investing in publicly listed REITs that hold large corporate office buildings as assets. The price is around 5,000 KRW per share. Representative large corporate-sponsored REITs include Lotte REITs, SK REITs, Hanwha REITs, and Samsung FN REITs. These REITs are characterized by stable asset management, as they hold prime office buildings of large corporations as assets and secure long-term lease contracts with affiliated companies. However, even large corporate-sponsored REITs are not free from burdens such as high interest rates and vacancies. In particular, there is a reasonable suspicion that retail investors who invested in REITs during periods of rising interest rates and declining office building prices have become scapegoats.

In the securities industry, it is expected that REITs' profitability will improve and stock prices will recover as the second half of the year progresses. There is strong anticipation that interest rate hikes will end within the year, and some view the current low REIT stock prices as an opportune time to invest. The advantage of large corporate REITs is the expectation of stable dividend income. To utilize this for asset management, it is essential to carefully examine loan interest rates and the marketability of the real estate included in the REIT assets.

REITs Are Dividend Stocks Suitable for Stable Investment Preferences

REITs are fundamentally dividend stocks. Large corporate-sponsored REITs are no different. Dividends can be received quarterly or semi-annually. Experts therefore recommend not to be swayed by short-term stock price fluctuations but to invest for the long term. From an investor's perspective, REIT shares priced around 5,000 KRW per share can be purchased without burden, allowing for steady dividend expectations. Especially, listed REITs tend to have high dividend payout ratios. The dividend payout ratio indicates the proportion of a company's net income paid out as dividends. Lotte REITs' cash dividend payout ratio increased from 178.3% at the end of 2020 to 246.39% at the end of 2022. SK REITs' cash dividend payout ratio also rose from 123.83% at the end of 2021 to 347.54% at the end of 2022.

Hanwha Insurance Building, Yeouido, Seoul.

If asset classes are concentrated in specific sectors such as office or retail, risk management through asset allocation becomes difficult during crises. Due to the nature of large corporate REITs, it is challenging to diversify assets across various sectors. Therefore, investors need to analyze more meticulously the location and marketability of individual assets included in large corporate-sponsored REITs. It is necessary to examine what assets are included in the REIT and the growth potential of those asset types in the market. REITs concentrated only in certain real estate assets that are booming at a given time may face increased risks depending on economic fluctuations.

Lotte REITs has faced suspicion since its inception for having a small proportion of assets in the metropolitan area and for possibly including non-prime assets alongside prime properties to offload them through the REIT. In fact, the only prime property is said to be Lotte Department Store Gangnam Branch. Some argue that Lotte Shopping established Lotte REITs with the intention of preemptively disposing of some non-prime assets, anticipating a large-scale sale of offline stores. There are suspicions that idle assets were offloaded to the REIT in advance.

Hanwha REITs, which was recently listed, shows a similar pattern. Expectations were dampened as key affiliated real estate such as Yeouido 63 Square and Janggyo-dong Hanwha Building were excluded from the included assets. In fact, excluding the Yeouido Hanwha General Insurance Building (purchase price 456 billion KRW), the assets included in Hanwha REITs are Hanwha Life's Nowon Building (29.8 billion KRW), Pyeongchon Building (62.5 billion KRW), Jungdong Building (65.4 billion KRW), and Guri Building (46.6 billion KRW), all priced below 100 billion KRW.

It is safer to check the target dividend yield in advance, the extent of large corporate equity participation, and, if leveraged, the interest rate level. Hanwha REITs offered a higher dividend yield than other REITs. The five-year average target dividend yield is 6.85%. Considering that other REITs have annual dividend yields ranging from 3% to 6%, this is relatively high. Samsung FN REITs' target dividend yield is relatively low at an average of 5.6% per year. Since it raised funds during a period of high interest rates last November, the interest burden is cited as a disadvantage leading to lower dividend yields compared to other REITs.

Kim Pil-gyu, Senior Research Fellow at the Korea Capital Market Institute, said, "In the past, the 'real estate never fails' myth was valid, but now with increased remote work and concerns about economic recession, there is uncertainty about what might happen. Although it is impossible to predict real estate prices, it is better if the real estate composing REIT assets is diversified across various sectors to spread risk."

It is also important to closely examine how actively asset management companies (AMCs) managing REIT assets operate. An industry insider said, "It is necessary to look into the human resources and capabilities of AMCs to see if they fulfill their fiduciary duties and continuously aim to increase high-quality assets."

Meanwhile, although the REIT market has slowed due to rapid interest rate hikes and sluggish real estate and stock markets, the entry of large corporations into the REIT market is expected to continue. This is because the need for asset securitization and cash reserves is growing amid concerns about economic recession. Large corporate-sponsored REIT candidates mentioned in the market include Naver, which owns mega data centers (IDCs) and office buildings; GS Group, which owns nationwide gas stations; Shinsegae Group, which owns department stores, large marts, and hotels; and Hyundai Motor Group, which is constructing the Global Business Center (GBC) on prime land in Gangnam.