[Real Investment Techniques] Will REITs' 'Dividend Party' Benefit from the 10·15 Measures?... Foreign and Institutional Investors Join Amid Falling Interest Rates

Dividend Yields Up to 9%: A Lifeline for Lost Ye-Tech Investors
Tougher Real Estate Regulations and Interest Rate Cuts Become Tailwinds

As the 10·15 measures, which designate all of Seoul and major areas of Gyeonggi Province as regulated zones, have intensified policy pressure on the housing market, Real Estate Investment Trusts (REITs), which are relatively free from tax and loan regulations, are emerging as alternative investment options. REITs are products based on real estate rental income, and amid strengthened housing regulations, they are being re-evaluated as stable, interest-generating assets.

The recent global trend of interest rate cuts is further enhancing the appeal of REITs. Last month, the United States Federal Reserve lowered its benchmark interest rate by 0.25 percentage points and even hinted at halting quantitative tightening. As a result, the likelihood of an additional rate cut by the Bank of Korea has increased. Reflecting this atmosphere, interest rates have dropped rapidly, and even in the secondary financial sector, most deposit products now offer annual rates in the 2% range. As it has become difficult to expect meaningful interest income, so-called 'Ye-Tech' investors (deposit + investment enthusiasts) are revisiting REITs as high-dividend assets that pay out annual dividends in the 7% range.

Listed REITs Market Reaches 9 Trillion Won... Attracting Both Foreign and Institutional Investors

According to the Korea REITs Association on October 22, as of the end of last month, there were 431 REITs in operation with assets under management (AUM) totaling 113.95 trillion won. Of these, 25 are listed REITs, with a market capitalization of 8.9367 trillion won and AUM of 27.4704 trillion won. As of last year, the average dividend yield of all REITs in operation was 5.7%, while listed REITs recorded an average dividend yield of 7.5%. As the gap with deposit interest rates widens, funds are expected to flow more quickly into dividend-oriented products such as REITs.

Foreign and institutional buying has also strengthened. In September alone, foreign investors made a net purchase of 2.64 million shares of major listed REITs, maintaining a buying trend for the second consecutive month following 4.13 million shares in August. Institutions also purchased more than 6.5 million shares. The preference for dividend-oriented products amid the interest rate cut phase appears to be attracting both foreign and institutional funds.

'Falling Interest Rates → Higher REIT Dividends' Becomes Reality

Lee Kyungja, head of the Alternative Investment Team at Samsung Securities Research Center, stated in a recent report, "This year, the REITs industry has moved past the phase of rising interest rates and is now embracing a declining rate environment," adding, "Large REITs with variable interest rate structures or higher utilization of corporate bonds are seeing lower financial costs translate into higher dividends."

Lotte REITs, with 2.6 trillion won in assets under management, saw its bond rate set at 2.997% in last month's bond demand forecast, dropping below 3%. Samsung FN REITs also lowered its funding rate from 6.9% to 3.9% while issuing bonds to acquire the Jamsil building owned by Samsung Life Insurance. This refinancing effect has nearly halved interest expenses. As a result, Samsung FN REITs increased its dividend per share (DPS) by 6% as of the April settlement this year and raised its dividend yield guidance from 5.3% to 5.5% (based on the public offering price). Lee explained, "Falling interest rates are directly lowering REITs' funding costs, making the formula of higher dividend yields a reality."

Recently, as interest rates have stabilized, more REITs are selling assets to realize profits and return them to shareholders. Shinhan Seobu T&D REITs, for example, is using funds secured from selling the Nine Tree Dongdaemun property, which was purchased at a low price in 2023, to pursue the acquisition of Mapo Shilla Stay, with plans to return a significant portion of the capital gains to shareholders.

High-Dividend REITs Offer 7-9% Returns... Double That of Deposits

In the domestic REITs market, high-dividend REITs with yields in the 7-9% range stand out. Notable examples include NH All One REITs (9.5%), Mirae Asset Global REITs (9.4%), KB Star REITs (9.0%), IGIS Value Plus REITs (8.2%), and JR Global REITs (7.8%). Samsung Securities forecasts this year's average dividend yield at around 6.5%, more than double the deposit interest rate. Lee stated, "Dividend increases are expected across the industry next year."

Among large REITs with a market capitalization of over 1 trillion won, Lotte REITs has shown the most stable performance. Its share price has risen 27% so far this year (as of October 20), recording the highest return among major listed REITs. SK REITs also rose 15.3% during the same period. SK REITs recently announced plans to acquire the SK Pangyo Office for 360.7 billion won. Without a separate rights offering, it secured acquisition funds through borrowing and asset sales, maintaining its loan-to-value (LTV) ratio at around 60%. Thanks to its major tenant, SK Telecom (with a AAA credit rating), its funding rate has also remained stable at around 3%. ESR Kendall Square REITs, specializing in logistics, posted a 5.2% return during the same period.

Among REITs with a market capitalization below 1 trillion won, Koramco The One REITs' share price has surged 62.8% this year, recording the highest return among domestic listed REITs. The sharp rise is attributed to expectations that its tenant, Hana Securities, will exercise its call option. There is even talk in the market of a possible REIT liquidation. Hana Securities has the right to purchase the Hana Securities Building in Yeouido, Seoul, as a priority for one month starting November 16. The purchase will be made at the higher of the appraised value or the offered price. If Hana Securities proceeds with the purchase, the REIT will return profits to investors through liquidation or a special dividend. If the sale price is 32 million won per pyeong, the net asset value (NAV) per share would be in the 8,600 won range, implying more than 30% upside from the current share price. Conversely, if the call option is not exercised, expectations of liquidation will disappear, making a price correction inevitable. The market is leaning toward the likelihood of the call option being exercised.

D&D Platform REITs (15.8%), Hanwha REITs (15.5%), and E-REITs Kocref (14.7%) also posted double-digit returns. E-REITs Kocref withdrew a rights offering last October due to shareholder opposition, but has since managed its financial structure conservatively and is working to restore trust. All five of its assets are located in prime areas near subway stations in Seoul and the metropolitan area, making them highly versatile, and their asset value has increased by more than 20% compared to the time of listing in 2018.

Cautions for Investing in REITs

Since REITs distribute real estate rental income to investors in the form of dividends, they are sensitive to interest rate changes. When interest rates fall, interest expenses decrease and asset values rise, increasing the capacity for dividends. Conversely, when rates rise, funding costs increase and yields decline.

The government plans to significantly expand REITs benefits to absorb market liquidity and redirect it to productive sectors. The Ministry of Land, Infrastructure and Transport announced the 'REITs Activation Plan' in June last year, followed by a legislative notice in October for amendments to the 'Real Estate Investment Company Act' to ease regulations, which are set to take effect next month. Once implemented, the amendments will allow REITs to expand their investment scope to include data centers, infrastructure facilities, and mortgage-backed securities (MBS), providing access to higher-yield assets. Mandatory compliance officers and strengthened disclosure requirements will also enhance transparency.

In the second half of this year, new listings such as Heungkuk REITs and Hana Financial REITs are scheduled, which is expected to further expand the REITs market. An industry official said, "REITs are not simply indirect real estate investments but are dividend-oriented assets that ride the interest rate cycle," adding, "From an investor's perspective, it is important to check not just the dividend yield but also how stable the actual cash flow is."