Process Simplification
Tax Incentives
Promote Investor Participation
Exemption of the Korea Exchange ’ s preliminary eligibility review application ( ERA ) requirement for managed-REITs applying for listing
Capital gains tax reduction on individuals from REITs investment
-Dividend income from public REIT shares is subject to a 9.9 % tax rate instead of the general income tax rate
+ +
Deferral of capital gains tax for investment-in-kind of real property assets into public REIT
Permission granted to defined benefit-type retirement pension funds to invest in public REITs to further expand investor pool from the public sector
( 1 ) Dividend income of up to KRW50MM and must meet all of the following criteria to be subject to the tax benefit ; i ) paid out within three years after the investment , ii ) paid out from public REIT shares invested on or before December 31 , 2021 . ( 2 ) Including local tax .
Source : ESR kendall Square REIT
likely to be the first Korean REIT to be included in the FTSE Epra Nareit Developed index . Given the attractive dividend yields in the Korean REIT market with high-quality commercial assets , there is no reason that Korea could not achieve similar successes observed in Japan and Singapore over the last two decades .
LENGTHY SECONDARY OFFERING PROCESS
One impediment we see to the sector ’ s growth is the complicated secondary offering process that REIT must go through to raise additional equity to fund acquisitions . The Lotte REIT rights issue ’ s process was long , and almost four months passed from the date of the announcement of its intention to acquire assets from the sponsor and the rights issue pricing . This led to an overhang and unit price erosion which did not benefit existing investors . Most developed markets in Asia have more efficient secondary offering processes , normally conducted via placements that limit the market risk to the issuer and price erosions created by the overhang . We are hopeful that the regulator , namely the Ministry of Land , Infrastructure and Transport ( MOLIT ), will examine capital raising practices in other Asian markets and look to ease this to improve the attractiveness and growth of the sector . We are also hopeful that large Korean corporations will consider REITs as a means to improve balance sheet efficiency , thanks to the recent listing success of Lotte REIT and SK Corp .
While we do not expect the market to grow overnight , there have been many positive steps in the last few years that have started South Korea on the path towards having an investible REIT market . Not including the recent SK Corp IPO or ESR Kendall Square rights offering , the public REIT market has grown at a 168 % Compound Annual Growth Rate ( CAGR ) from 2017-2020 to 7.4 trillion won but remains small compared to the private REIT market in Korea . We hope that domestic institutional investors and pension funds look to diversify their real estate investments from private vehicles to listed public REITs . According to one REIT ’ s management , they believe this is starting to happen on a small scale . It took some time for the J-REIT and S-REIT sectors to grow after their respective first listings of Nippon Building Fund , Japan Real Estate , CapitaMall and Ascendas REIT , but their successful growth in the early years attracted other listings and helped expand both markets into leading global REIT markets . We hope the recent IPOs and follow-on raises by Korean issuers will trigger the same result .
ABOUT THE AUTHOR
Christian Bernasconi has over 30 years of experience as an Asian and Japanese equities specialist and has been based in Switzerland and Singapore over his career .
Before co-founding B & I Capital in 2007 , Bernasconi was an Executive Director at UBS , where he established the Japan and Asian Equity Sales platform . He was part of the Global Real Estate ( RE ) Team in Zurich .
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