Korean Reits -Characteristics and Their Economic Impacts
Korean REITs were introduced in 2001, to stimulate the restructuring of the economy and revitalize the real estate market after the crisis of 1997. In this study, the main frameworks of Korean REITs are presented, first.
Secondly, the characteristics of the Korean REITs system are analyzed, and compared with the case of the U.S. are used.
Thirdly, we analyze the current state and prospects of Korean REITs. Finally, their impacts on Korean real estate and financial markets are analyzed. These Reits were introduced in April 2001, through the legislation of the Real Estate Investment Company Act’.
Later, corporate restructuring REITs (CR-REITs), to invest in the real estate owned by corporate and financial institutions that need restructuring, were introduced in May 2001, by revising the Real Estate Investment Company Act. The main purpose of the introduction of CR-REITs was to stimulate the restructuring of corporate and financial institutions.
On 11th May 2020, NH Prime REIT, Lotte REIT, Shinhan Alpha REIT, E-REITs[1]KOCREF, Mode Tour REIT, K Top REIT, and A REIT comprise a total of seven REITs listed on the Korean stock exchange.
In contrast to the average YTD return lingering at -17% for the six stocks excluding A REIT, the KOSPI index has already recovered most of its losses from its peak of 2,200 at the beginning of the year to a low of 1,400 recorded in mid-March to close at 1,935 on 11th May.
Concerns over the slowing real economy have had a greater negative effect on listed REITs than the overall market. Total footfall has dramatically fallen due to social distancing restrictions, ‘intact’ culture, school closures, and remote working, and consumers have turned away from large hypermarts, department stores, and shopping malls in favour of online channels.
While there is no immediate impact on the office sector, it seems that deteriorating corporate earnings especially for those in international trade are being reflected in the prices of the office REITs. Most domestic listed REITs are exposed to retail and office assets and have thus suffered sharper price declines.
Three of the seven listed REITs are office REITs and have all plummeted YTD. NH Prime REIT, owner of a portfolio of core office buildings in Seoul, marked a loss of -19.8% YTD, and Shinhan Alpha REIT, owner of office buildings in the Seoul Metropolitan Area, a loss of -19.2% YTD. Two REITs invest in retail properties, Lotte REIT and E-REITS-KOCREF.
Lotte REIT is invested in Lotte Group’s hypermarts and department stores, while E-REITS-KOCREF invests in stores operated by ELAND Retail. These two stocks have been impacted directly by the downturn in offline retail and posted returns of -14.4% and -21.2%, respectively.
On the other hand, REITs focusing on sectors other than office or retail performed better relatively. A REIT, which develops and leases residential space, fell by only 0.9% during the same period. Lotte REIT and NH Prime REIT, both of which had successfully drawn public interest with subscription rates of over 65x and 317x, are comparatively more sensitive to the economic cycles with retail stores, shopping malls and office buildings as underlying investments.
The number of investment products in these sectors is likely to fall as companies continue to operate under the current challenging market conditions, while new investment products with exposure to the logistics sector will be launched.
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