Professor Kim Kyung-min of Seoul National University and Director Na Hyun-joo of the Bank of Korea Joint Report
"Significantly Reduce National Housing Burden Using REITs"
A proposal has emerged suggesting that a new concept of real estate investment trusts (REITs) can reduce the housing burden on the public and further alleviate the rapidly increasing household debt problem.
On the 5th, Professor Kim Kyung-min of Seoul National University’s Graduate School of Environmental Studies and Na Hyun-joo, a researcher from the Financial Stability Research Team at the Bank of Korea, released a report titled "A Study on the Activation Plan of Housing Finance Using REITs," proposing a Korean-style New REIT system that can ease household debt. The report was unveiled at a policy symposium held at the Bank of Korea’s headquarters in Jung-gu, Seoul, under the theme "Challenges of Household and Corporate Finance in Korea."
The core of the Korean-style New REITs is a plan to replace a significant portion of the funds needed for home purchase and rental from debt to private capital (Debt-Equity Swap) by utilizing the existing REIT system.
Until now, citizens have had to borrow large sums from banks when buying or renting homes, bearing interest burdens and increasing household debt, which has become a national issue. However, by using the new REITs, people can secure housing without incurring large debts. Households that invest a certain minimum equity in the REIT gain the right to reside in the homes owned by the REIT company.
Professor Kim emphasized, "Households can invest in Korean-style REIT products to earn dividend income, live in homes owned by the REIT company, hold REIT shares, and accumulate capital gains upon selling their shares."
Dividend income is based on rent collected from households (tenants) residing in the homes owned by the REIT company. If the asset value (housing prices) held by the REIT company rises, the stock price of the REIT company also increases, enabling capital gains on equity.
Professor Kim argued that government support is essential for the system to take root. Since REITs are a type of investment product, government assistance is necessary at the initial stage to minimize losses, such as developing land (housing) in favorable locations in Seoul or the metropolitan area.
He stated, "Considering past housing price trends, if REIT complexes are developed in favorable locations centered around the metropolitan area, the likelihood of investment losses is low."
The Korean-style REIT system involves the government selecting suitable candidate sites from public land based on business feasibility and housing demand, after which private developers establish REITs and coordinate detailed business plans with the Housing and Urban Guarantee Corporation (HUG) to secure funding. Funding is provided by the Housing and Urban Guarantee Corporation through housing and urban funds, while the REIT company raises capital through public and private investments and borrowings.
The Bank of Korea believes that the introduction of Korean-style REITs can also alleviate the household debt problem. As of the second quarter of this year, Korea’s household debt-to-nominal GDP ratio stands at 91.1%, one of the highest levels globally. The proportion of mortgage loans within household loans also reaches 61.4%.
Na Hyun-joo from the Bank of Korea said, "By replacing a significant portion of the funds needed for home purchase and rental from loans to private capital, the increase in household debt can be curbed. Additionally, by dispersing the housing price fluctuation risk, which was concentrated on households and financial institutions handling mortgage loans, to numerous private investors, it can contribute to macroprudential management."
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