Financial Research Institute: "Private Real Estate Funds and REITs Must Be Revitalized"
To prevent the recurrence of domestic real estate project financing (PF) insolvency crises, an analysis suggests that the low-capital, high-leverage structure of developers, which is the root cause of the chain insolvency, must be improved.
On the 13th, Shin Yongsang, Senior Research Fellow at the Korea Institute of Finance, proposed in a report titled "Suggestions to Prevent the Recurrence of Domestic Real Estate PF Project Crises" to activate private real estate funds dedicated to real estate PF development projects and to strengthen capital ratio regulations for developers.
According to the report, the current real estate PF projects are structured so that developers can invest only a small amount of capital but gain huge profits if successful. However, if the project fails, the related credit risk is transferred not only to construction companies and financial institutions but also to homebuyers, and in the worst case, it can escalate into a systemic risk. In fact, according to a survey by the Korea Development Institute (KDI), the average equity capital ratio of developers in about 300 real estate PF projects carried out from 2021 to 2023 was only 3.15%, with approximately 97% of the project costs financed through borrowing.
Senior Research Fellow Shin emphasized the need to expand the scale of developers' equity capital and improve the low-capital, high-leverage structure by activating development-type private real estate funds and REITs (Real Estate Investment Trusts) that utilize institutional investors' equity investments from the development stage of real estate PF projects. He also added that it is necessary to rationally improve regulations that hinder institutional investors' equity participation at the development stage and to establish special measures to remove tax disadvantages.
He further stated that it is necessary to introduce soundness regulations that strengthen capital ratio requirements for developers. Simply introducing development-type private real estate funds and REITs without reorganizing the regulatory system, which currently imposes no capital regulations on developers, cannot completely replace the developers' low-capital, high-leverage structure. Under current law, corporations can register as developers if they have a capital of 300 million KRW or more, and individual businesses can register if they have business asset appraisals of 600 million KRW or more.
Additionally, considering that the underlying laws and supervising departments for real estate funds and REITs differ, measures to minimize regulatory arbitrage and activate the market by resolving regulatory gaps between the two should also be considered. Furthermore, since development-type private real estate funds and REITs may be exposed to high risks when participating in real estate PF, it is necessary to cultivate expert groups specializing in project feasibility evaluation and development-related fields.
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
