[Exclusive] Public-Supported Private Rental REITs Halt New Investments... Government Seeks Breakthrough by Increasing Private Sector Burden

Funding Shortage Halts Project Just One Year After REITs Activation Plan
"Financial Source" Housing and Urban Fund Surplus Falls Below 10 Trillion Won for First Time in 15 Years
Government Seeks Breakthrough with Supplementary Budget and Investment Ratio Adjustment Amid Private Developers' Discontent

The public-supported private rental housing project, which the government introduced last year to address problematic project financing (PF) projects, has found itself in crisis just one year after its launch. This initiative was designed to supply rental housing by supporting troubled bridge loans that could not transition to full PF, with funding from the Housing and Urban Fund. However, as the fund’s budget has been depleted, new investments have effectively come to a halt.

The government is considering lowering its investment ratio per project in order to increase the number of projects it can support. However, this is seen as only a temporary measure, raising concerns that another PF crisis could emerge or that the entire private rental housing supply chain could be destabilized.

According to the Ministry of Land, Infrastructure and Transport and HUG on May 15, new investments in the public-supported private rental REITs project have effectively stopped due to a lack of funds. At the beginning of this year, the government pledged to allocate 450 billion won to this project as part of its "2025 Economic Policy Direction." Currently, only 100 billion won remains. Although an additional 150 billion won was urgently allocated through a supplementary budget, it is still insufficient to keep the project running normally. An official from the Ministry of Land stated, "We have already spent more than 70% of this year’s budget. There is almost no money left, yet demand is enormous, so we are facing a lot of difficulties."

The downturn in the construction market, which has made the pre-sale market difficult, has been a major factor. Many private developers have turned to the rental housing business, which allows them to proceed with projects even if returns are lower, rather than paying high bridge loan interest. The public-supported private rental REITs project was expanded in June last year following the government's announcement of the "REITs Activation Plan." The structure involves acquiring land from projects struggling to repay bridge loans, establishing REITs with funding from the Housing and Urban Fund and private capital, and supplying rental housing. By the fourth quarter of last year, a total of 136 REITs had received investment approval, with plans to supply 105,303 housing units.

The surplus funds in the Housing and Urban Fund, which serve as the financial source for the REITs project, have plummeted from 49 trillion won in 2021 to just 7.9 trillion won as of March this year. This is the first time in 15 years, since 2010, that the balance has dropped below 10 trillion won. Several factors have contributed to this decline, including a decrease in the issuance of National Housing Bonds, sluggish payments into subscription savings, and increased spending on support for victims of jeonse fraud. The surplus funds have continued to decrease: 43 trillion won in 2022, 18 trillion won in 2023, and 10.1 trillion won last year. With this sharp decline, there is effectively no capacity left for additional investments in the REITs project.

The government is trying to increase the number of supported projects by reducing its investment ratio. A HUG official stated, "To normalize the project, we are considering lowering the investment ratio from the current 14% to 10%." The current structure consists of HUG investing 14%, the private sector 6%, and the remaining 80% being financed through loans and rental deposits. The 4% reduction from HUG's share is expected to be covered by increased private sector loans. During an industry meeting last month attended by HUG, the Ministry of Land, and private developers, the idea of reducing HUG’s investment ratio began to gain traction.

However, there are concerns in the market that as the joint investment structure between the government and the private sector becomes unstable, the entire rental housing market could contract. Without securing additional investment capacity, simply adjusting HUG’s investment ratio will not be enough to increase the number of supported projects. Many private developers and mid-sized construction firms that have been preparing for the project based on government policy over the past year now need to secure alternative funding sources. Given that many mid-sized companies have been hit hard by the recent downturn in the construction market, the risk of insolvency is increasing.

An industry insider commented, "It has been only a year since the government declared the activation of REITs, yet the project is already in crisis, undermining policy credibility. If the proportion of loans increases, interest costs and other expenses will rise, inevitably worsening the profitability of the projects." Some observers predict that normalization of the project may only be possible after the presidential election.