First Project REITs Chosen for Their 'Public Benefit'

Dongtan: Responding to an Aging Society, Cheonan: Urban Regeneration
Ministry of Land: "Swift Approval in Line with Policy Goals"
Promoting the Establishment of Advanced Development Projects

The government has selected the first approved targets for its new 'project REITs' regime based not only on whether they met formal requirements, but also by placing emphasis on their level of public contribution.

According to the Ministry of Land, Infrastructure and Transport (MOLIT) on the 22nd, the ministry approved 'Dongtan Healthcare REIT' and 'Cheonan Station Area Innovation District Regeneration Project REIT' on the 19th as the first project REITs.

A MOLIT official said, "In principle, authorization is granted when formal requirements such as capital are met under the current law," but added, "Dongtan Healthcare has symbolic significance in responding to an aging society, and the Cheonan station area project has strong public interest due to the participation of the local government. We therefore concluded that they align with the purpose of introducing the system and processed them swiftly."

In effect, the government has opened the door on a priority basis to projects that can create lasting value, such as operating healthcare facilities or building regional hubs, rather than simply constructing buildings and walking away.

REITs (Real Estate Investment Trusts) are stock companies that pool funds from multiple investors, invest in real estate, and distribute the resulting income as dividends. While conventional REITs have largely been limited to purchasing already completed buildings and generating rental income, project REITs are a system under which regulations have been significantly eased so that REITs can participate directly from the development stage.

Previously, REITs could only be utilized after completion, so during the development stage, developers had to establish project financing vehicles (PFVs) with small amounts of capital and rely on high-interest project financing loans. Because PFVs are not subject to borrowing limits, they were able to undertake high-risk projects with as little as 2% to 3% equity, leaving them highly vulnerable to insolvency. However, with this institutional improvement, it has become possible to raise funds through REITs even before construction begins, which will fundamentally transform the financial structure of such projects.

Dongtan Healthcare REIT is a senior housing model designed in line with Korea's entry into a super-aged society. Established by MDM, the largest developer in Korea, this REIT will develop 1,150 officetel units, 2,898 senior welfare housing units, and an oriental medicine hospital in the Hwaseong area of Gyeonggi Province. A total project cost of 2.2 trillion won will be invested, with completion scheduled for 2030. After the project is finished, the REIT will directly lease and operate the senior welfare housing and the hospital, excluding the officetels.

The Cheonan Station Area REIT is a local government-linked model in which Cheonan City, Korail, and others invest equity to drive urban regeneration. It will develop multifamily housing, a knowledge industry center, and a park-and-ride parking facility. Once development is complete, the REIT will lease and operate the multifamily housing, while the other facilities will be sold, with the aim of securing both profitability and public interest.

The project REITs system was fully introduced on November 28. To date, five applications for establishment approval have been submitted to MOLIT, and there have been more than 10 preliminary inquiries related to dormitories, rental housing, power plants, and other projects.

The government expects market interest to grow further as the Restriction of Special Taxation Act, which will allow deferral of corporate tax and other taxes when contributing land and other in-kind assets to project REITs, takes effect in January next year. MOLIT plans to continue identifying exemplary cases so that a developed-country model, in which REITs with stable equity capital are responsible for projects from development through operation, can take firm root.