Strong Performance of Logistics REITs... "Expecting a Golden Era for REITs if Interest Rates Drop"

In the first half of this year, the performance of REITs (Real Estate Investment Trusts) with logistics centers as assets showed improvement. The industry expects the REITs market to continue warming up, anticipating interest rate cuts originating from the U.S.

Jung Byung-yoon, Chairman of the Korea REITs Association, is speaking at the 'Listed REITs Investment Meeting' held at the Korea REITs Association in Yeouido, Seoul on the 18th. / Photo by Noh Kyung-jo

On the 18th, Lee Dong-jin, Head of ESR Kendal Square REITs Management, announced at the 'Listed REITs Investment Briefing' held at the Korea REITs Association in Yeouido, Seoul, that ESR Kendal Square REITs' operating profit for the 9th fiscal year (December 2023 to May 2024) increased by 19.0% year-on-year to 28.8 billion KRW. Operating revenue, corresponding to sales, rose by 5.5% to 55.9 billion KRW, and net profit surged by 89.1% to 22.5 billion KRW.

ESR Kendal Square REITs specializes in logistics centers. Out of a total of 18 logistics centers, it directly owns 14 and holds 4 in the form of beneficiary certificates. Lee said, "All 18 logistics warehouses maintain a 100% occupancy rate."

He predicted that market conditions would improve further. Due to rising construction costs and a decrease in permits, supply is expected to sharply decline from this year, potentially easing supply-demand imbalances. However, he noted that while domestic capital investment in logistics centers has shrunk due to prolonged high interest rates and real estate project financing (PF) crises, foreign capital investment in domestic real estate has significantly increased.

Rental fees are also on the rise. Last year, the renewal rental fees for ESR Kendal Square REITs' assets increased by about 23% compared to the previous contracts. The market prices in the downtown, southwest, and southeast areas are all about 10% higher than the average rental fees, so rental fee increases are expected upon renewal.

Lee said, "If interest rates decrease, it will be beneficial for defending asset prices and reducing interest cost burdens, which will be a strong positive factor. As long as demand remains solid, rental fees could rise more steeply, so concerns about logistics REITs can be eased." He also predicted, "The biggest cause of rising vacancy rates in logistics centers is the increase in cold storage logistics centers, but as cold storage gradually converts to ambient temperature storage, vacancy rates will be resolved."

Besides ESR Kendal Square REITs, other REIT stocks have also generally been on the rise recently. This is due to the government's REIT activation plan announced last month and growing expectations for interest rate cuts ahead of the U.S. presidential election. Coramco Life Infrastructure REIT's dividend yield last year was 6.99%, exceeding the initial public offering (IPO) target of 6.2%. This year's operating revenue is estimated to increase by about 2.9% from last year's 58.9 billion KRW to 60.6 billion KRW. Coramco Asset Trust plans to diversify the assets included in Coramco Life Infrastructure REIT.

Shinhan Global Active REIT said that while not immediately, it plans to conduct a paid-in capital increase if positive signals appear in earnings and stock trends. Yoon Young-jin, Director of Shinhan REITs Management, said, "We will continue to maintain our philosophy of diversification and safety. We have set the initial two-year dividend yield at 8.5%. Afterwards, we plan to regularize special dividends to periodically return asset value appreciation to investors."

On the same day, Jung Byung-yoon, Chairman of the Korea REITs Association, said, "Since the government's REIT activation measures were announced last month, REITs have become hot," adding, "If interest rates are cut, we might see another golden age for REITs." However, he expressed doubts about whether the REITs market will grow as large as in advanced countries, saying, "Advanced countries like the U.S. have no tax regulations on REITs, but we still have strict regulations, which is a limitation." He added, "Even if you buy REITs, the acquisition tax is 12.0%. It's a structure that discourages business. The issue of comprehensive real estate tax aggregation also remains."