All questions
Overview of the market
Because the enactment of the Actual Property Funding Belief Act (REIT Act) in 2001 and the introduction of the actual property fund (REF) as an funding automobile pursuant to the Oblique Funding Asset Administration Enterprise Act (which was later merged into the Monetary Providers and Capital Markets Act (FSCMA)) in 2004, business actual property transactions have migrated from conventional fashions to funding vehicle-oriented fashions. REFs, in addition to actual property funding trusts (REITs), have been broadly used for actual property funding and transactions and have change into main gamers within the Korean business actual property market.
The tables under present that numbers and funding quantities of such funding autos have elevated lately.
December 2016 | December 2017 | December 2018 | December 2019 | December 2020 | |
---|---|---|---|---|---|
No. of REFs (personal REFs) | 1,175 (1,146) | 1,506 (1,470) | 1,933 (1,885) | 2,116 (2,054) | 2,292 (2,236) |
Public provide (unit:100 million received) | 19,866 | 23,290 | 32,234 | 31,176 | 30,039 |
Non-public provide (unit: 100 million received) | 578,179 | 732,174 | 951,146 | 1,082,829 | 1,219,395 |
Complete (unit: 100 million received) | 598,046 | 755,464 | 983,380 | 1,114,005 | 1,249,434 |
Supply: Korea Monetary Funding Affiliation
2016 | 2017 | 2018 | 2019 | December 2020 | |
---|---|---|---|---|---|
No. of REITs | 193 | 219 | 248 | 282 | 315 |
Complete fairness (unit: 100 million received) | 127,340 | 145,342 | 171,236 | 216,924 | 264,729 |
Complete property (unit: 100 million received) | 342,262 | 432,360 | 489,788 | 613,000 | 782,355 |
Supply: Ministry of Land, Infrastructure and Transport, Korea Affiliation of Actual Property Funding Trusts
The actual property funding market in South Korea is especially targeted on workplace buildings situated in the primary enterprise districts in Seoul. Historically, the primary enterprise districts of Seoul comprise the Central Enterprise District (CBD), Gangnam Enterprise District (GBD) and Yeoido Enterprise District (YBD). Actual property funding shouldn’t be restricted to Seoul and, as defined in Part VI, whereas there’s a rising development of funding in logistics and distribution centres situated in Seoul metropolitan space, it’s nonetheless useful to categorise and remember the aforementioned main enterprise districts in Seoul.
Latest market exercise
Business actual property investments in Seoul totalled roughly 20 trillion received in 2021, a rise for 4 consecutive years since 2018. Whereas workplace constructing transactions barely decreased, logistics and distribution centre transactions considerably elevated. Resort gross sales quantity additionally elevated throughout 2021, largely pushed by the demand for rebuilding outdated resorts into new residential or business workplace buildings. Given low rates of interest and excessive liquidity inside the nation and declining cross-border funding through the covid-19 pandemic, 92 per cent of the overall actual property funding quantity got here from home traders, lowering international funding to lower than 10 per cent through the previous two years.
Whereas the provision of recent workplace buildings has decreased, the demand by these firms benefiting from the pandemic led to a document excessive lease occupancy of 555,000 sq. metres in 2021, which contributed to an roughly 4.3 per cent enhance (from the earlier yr) in hire for prime workplace house in Seoul.
A surge in on-line purchasing attributable to a rise in one-person households and covid-19 affected each provide and demand for logistics and distribution centres. Regardless of a complete of roughly 1.675 million sq. metres of recent logistics centres within the Seoul metropolitan metropolis space, the emptiness price has reached a document low of 1 per cent.
Actual property firms and corporations
Along with the final types of companies, joint-stock companies and restricted legal responsibility firm below the Korean Business Code (KCC), there are particular particular types of actual property funding autos below Korean regulation – particularly, REITs, REFs and venture financing autos (PFVs).
In essence, REITs require public providing, however below sure exceptions they are often established and operated privately. The REF additionally has each public providing funds and personal placement funds. Accordingly, this chapter is not going to distinguish between publicly traded REITs, actual property working firms and actual property personal fairness corporations, however as an alternative will clarify every sort of funding automobile recognised below Korean regulation.
i REITs
REITs are established and controlled by the REIT Act and are principally regulated and supervised by the Ministry of Land, Infrastructure and Transportation (MOLIT). Nevertheless, because the authorized type of a REIT is a joint-stock company below Korean regulation, issues that aren’t particularly offered within the REIT Act shall be ruled by the KCC and issues regarding public providing and itemizing shall be ruled by the FSCMA.
Relying on the operation strategies, REITs might be categorized into self-managed REITs, REITs managed by an asset administration firm and company restructuring REITs (CR-REITs).
Amongst these, CR-REITs are used solely for the particular objective of company restructuring, and are defined additional in Part V. A REIT that’s managed by an asset administration firm is a paper firm and its asset administration is dealt with by a separate asset administration firm. Self-managed REITs are operated in the identical approach as atypical companies; in different phrases, enterprise choices are made by the board of administrators and at shareholders’ conferences however are topic to extra authorized restrictions in contrast with REITs managed by an asset administration firm. For instance, self-managed REITs are required to have greater than 5 asset administration professionals working there. Because of this, self-managed REITs are much less most popular by traders.
To determine an REIT, a enterprise approval issued by the MOLIT is required. As well as, REITs are topic to the next restrictions below the REIT Act:
- a minimal capital requirement of 5 billion received;
- the REIT shall provide not less than 30 per cent of its shares to most of the people inside six months of acquiring enterprise approval from the MOLIT;
- the REIT shall not have any single shareholder that owns greater than 50 per cent (with sure exceptions);
- the REIT shall change into a listed firm if it meets the {qualifications} of a listed firm below the FSCMA; and
- the REIT shall distribute not lower than 90 per cent of its distributable revenue to its shareholders.
Moreover, property of REITs have to be invested and operated by means of:
- the acquisition, administration, enchancment and disposition of actual property;
- an actual property improvement enterprise;
- an actual property lease;
- the sale and buy of a sure safety;
- a deposit in monetary establishments;
- the acquisition, administration and disposition of authorized rights to make use of actual property, similar to a floor proper or leasehold proper; or
- the acquisition, administration and disposition of beneficiary rights to an actual property belief.
On this regard, the next restrictions are relevant:
- not less than 70 per cent of the property shall be invested in actual property;
- relating to necessities for actual property improvement initiatives invested: the funding ratio shall be set by a shareholders’ decision and the marketing strategy is required to be confirmed by a licensed actual funding consulting service firm; and
- there shall be a prohibition in opposition to the disposition of actual property for a selected time interval stipulated within the articles of incorporation, not exceeding one yr for home actual property or 5 years for international actual property.
REITs have change into widespread in initiatives involving the event of multipurpose buildings having each residential and business items, similar to resorts, department shops, supermarkets and retail shops.
ii REFs
REFs are collective funding autos ruled by the FSCMA. REFs could also be structured within the type of a belief, a company or an affiliation. The most typical sort of REF fashioned by traders is the trust-type REF. Whereas there are not any substantial variations amongst a lot of these REFs by way of advantages or benefits, a trust-type REF is most popular by traders as a result of it’s comparatively simpler or easy to type a trust-type REF in comparison with different forms of REF. Not like REITs, REFs should not topic to sure authorized necessities similar to public providing or itemizing, dividend distribution and most possession caps on single traders. As such, REFs are at present the most well-liked funding autos utilized by actual property traders in Korea.
To determine a REF, not less than two or extra individuals are required and the institution of a REF have to be registered with the Monetary Providers Fee (FSC).
A REF is required to handle its property by means of an asset administration firm with fairness of two billion received or extra and with 5 or extra asset administration professionals. As REFs have been initially permitted as an oblique funding or collective funding automobile, traders are prohibited from immediately making choices on issues regarding the administration of property owned by a REF.
Furthermore, not less than 50 per cent of the property have to be invested in actual property. A REF should spend money on:
- actual property;
- by-product merchandise based mostly on actual property;
- loans to companies associated to actual property improvement;
- the event, administration, enchancment, lease or operation of actual property; or
- securities regarding actual property.
Nevertheless, when investing in actual property improvement, a REF should get hold of affirmation on its marketing strategy from an unbiased appraisal firm. Additional, if a REF acquires home actual property, it should maintain and keep possession thereof for not less than one yr.
iii PFVs
A PFV is without doubt one of the types of funding automobile used for actual property improvement initiatives. It’s tough, nevertheless, to determine correct information and knowledge regarding PFVs as they’re solely registered with native tax places of work within the related jurisdictions, as an alternative of being ruled by a single central company, specifically, the Nationwide Tax Service.
A PFV is established as a joint-stock company below the KCC for the aim of participating within the enterprise of facility funding, social oblique capital facility funding or improvement of assets, or another specifically designated enterprise that requires a substantial funding of time and capital and distribution of earnings to its shareholders. A PFV is a paper firm and should not have any staff or full-time officers or administrators. It’s based mostly on the Company Revenue Tax Act and enjoys sure tax advantages, specifically exemption from company revenue tax if it distributes 90 per cent or extra of its distributable revenue as dividends.
PFVs have been broadly embraced by traders as a result of they solely require a report back to the related tax workplace along with a normal incorporation course of; and they aren’t topic to different reporting necessities (whereas the asset administration firm of a REF has reporting obligations to the FSC and REITs are required to submit a quarterly enterprise report back to the MOLIT). As well as, PFVs are engaging amongst traders as their participation within the decision-making course of regarding funding is permitted.
Nevertheless, the relevant regulation requires {that a} PFV have to be established for the precise objective of improvement enterprise, however it’s interpreted that such improvement enterprise doesn’t embrace possession, operation or lease of actual property. As such, a PFV is established primarily for actual property improvement enterprise and, when its improvement enterprise ends, the PFV usually sells off the actual property and distributes the earnings from such sale to traders.
Transactions
i Authorized frameworks and deal constructions
Though there was a transaction in 2016 the place Blackstone bought its first actual property in Korea (Capital Tower, situated in GBD) by buying beneficiary rights of the REF who owned mentioned actual property, probably the most generally used methodology in actual property transactions within the Korean market is having an funding automobile to amass possession of actual property and pay the proceeds to the earlier proprietor in money. Whereas the sale and buy of beneficiary rights of REFs or inventory of REITs are permissible below the related legal guidelines, they aren’t broadly utilized in apply.
For actual property transactions by means of funding autos, the bidding course of shouldn’t be legally required and there are a lot of circumstances the place transactions are concluded by means of personal negotiations. In lots of circumstances, the bidding course of might be fully public and is obtainable to a restricted variety of potential traders, which satisfies sure requirements set by the vendor. By doing so, a transaction involving situations which are in keeping with the events’ wants can happen. For instance, within the case of the sale of the Ok Twin Tower, talked about above, the vendor positioned precedence on the speedy conclusion of the transaction, and consequently KB Funding Safety determined to undertake many of the fairness in the interim and promote it down later.
Ordinarily, the vendor selects an actual property consulting firm, accounting agency and regulation agency as its advisers to proceed with the sale of its actual property, and in response the customer additionally has the same group of advisers who can take cost of such processes as due diligence and valuation.
Along with the final provisions of the Civil Code on actual property, REFs are topic to the FSCMA and the KCC (within the case of corporation-type REFs) whereas REITs are topic to the REIT Act and the KCC.
REFs
Choices on the acquisition and disposition of actual property owned by a REF are made by the asset administration firm, and fund traders can’t be concerned on this decision-making course of. The asset administration firm has the fiduciary duties below the FSCMA, and is required to report and disclose essential issues (such because the acquisition and disposition of actual property) to the FSC. In apply, such submitting of a fund is finished by means of the Digital Submitting Service2 offered by the Korean Monetary Funding Affiliation.
REITs
For issues regarding the acquisition and disposition of actual property, resolutions by the board of administrators and the shareholders’ assembly are required. For essential issues such because the acquisition and disposition of actual property, a REIT should report back to and file with the MOLIT and FSC in accordance with the REIT Act. In apply, submitting of a REIT is finished by means of the REITs Info System3 offered by the MOLIT.
ii Acquisition settlement termsClosing situations
The situations which are usually included in an settlement for an atypical M&A transaction should be included.
Closing
Within the occasion that each vendor and purchaser use acquisition financing, the discharge of any current safety proper on the actual property topic to the transaction and creation of a brand new safety proper for the customer’s lender have to be accomplished on the deadline, and thus the provisions stipulating the mechanism for the aforementioned situations should be included.
Pre-closing covenants
The situations which are usually included in an settlement for an atypical M&A transaction, in addition to a covenant to remedy any violation of regulation that has been recognized by means of the due diligence, should be included. Moreover, it’s common to incorporate a provision setting forth the methods to take care of the prevailing tenant within the topic actual property, for instance, who will procure the consent of the tenant on the change of landlord, because of the change in possession of the topic actual property, and the way the events will cooperate.
Representations and warranties
Typical representations and warranties in actual property transactions are as follows:
- authorisation;
- enforceability;
- title;
- registration;
- authorities approval;
- no expropriation or encroachment;
- no encumbrances;
- no violation;
- compliance with zoning or planning;
- condemnation;
- surroundings;
- no hazardous supplies;
- no litigation or dispute; and
- taxes.
Proration
Any earnings from the topic actual property (similar to rents) and any prices pertaining thereto (similar to utility charges) have to be calculated and prorated to every of the customer and the vendor as of the deadline. Usually, the events embrace a proration provision stipulating that such earnings and prices accrued till the day earlier than the deadline are borne by the vendor, whereas such earnings and prices accrued after midnight on the deadline are borne by the customer.
Indemnification
On many events the place each the vendor and the customer use funding autos, indemnification is deemed meaningless as a result of the vendor’s funding automobile will seemingly distribute revenue from the gross sales proceeds to traders and thus it not exists when the deal is closed.
Break charges and different deal protections
Article 565 of the Civil Code gives that when a deposit is made by the customer to the vendor on the time of coming into right into a gross sales contract, the vendor could terminate such contract by paying double the quantity it acquired from the customer. This Article is relevant solely when there isn’t any different settlement between the events. Thus, to strengthen the binding results of the contract, the events could embrace a provision explicitly ruling out the appliance of the above Article or stipulating liquidated damages as break charges.
Tax
In atypical transactions, every get together bears its personal taxes. As an illustration, any acquisition tax is borne by the customer and any taxes imposed on the acquire on switch of the actual property are borne by the vendor.
iii Hostile transactions
No hostile transactions by or in opposition to public actual property funding autos in Korea have been reported up to now. As a result of transactions for the sale and buy of actual property itself are frequent within the Korean market, it’s uncommon to see any hostile transactions, similar to M&A, for the acquisition of an funding automobile.
iv Financing concerns
Like all normal M&A transaction, fairness financing and debt financing might be utilised in actual property transactions in Korea. Fairness financing is carried by traders both paying funding funds right into a REF and buying beneficiary rights, or paying share subscription cash right into a REIT and buying shares.
For debt financing, the limitation on the mortgage quantity might be imposed relying on the kind of funding automobile:
- for REITs, it’s as much as double (or 10 occasions below sure exceptions) the quantity of the online property;
- for REFs, it’s as much as double the quantity of the online property; and
- for PFVs, no such limitation is imposed.
A typical safety for actual property traders borrowing funds to amass or develop actual property is a mortgage on the actual property, which might be created by a mortgage settlement between the lender and the borrower and registered in the actual property registry. If the debtor fails to pay again the mortgage, the creditor could implement its safety rights by requesting the court docket to rearrange an public sale to promote the actual property.
One other sort of safety that’s sometimes utilized in actual property financing in Korea is a safety belief, below which the actual property investor entrusts the actual property to a trustee (usually, a licensed belief firm) for the aim of debt safety. In that case, the lender turns into a beneficiary and is granted a precedence curiosity below such association. The the explanation why such a safety belief is often used and typically most popular by traders are as follows. First, within the case of a mortgage, the mortgaged actual property have to be disposed below the court docket procedures in accordance with the Civil Execution Act, whereas within the case of a safety belief, the disposition of the actual property might be agreed by and between the events to the belief settlement and thus there’s flexibility. Second, within the case of a safety belief, the possession and title of the actual property are transferred to the belief firm, and due to this fact, even when the debtor goes into chapter 11 or dissolution proceedings, the actual property might be separated from such proceedings and stay topic to the creditor’s train of rights.
v Tax considerationsAcquisition tax
When an individual acquires actual property by means of a transaction in Korea, they have to pay an acquisition tax at a price of 4.6 per cent (inclusive of surtax) of the acquisition value – in different phrases, the acquisition value reported on the time of acquisition. Deemed acquisition tax applies to share offers involving a company holding actual property. In such transaction, deemed acquisition tax is imposed when an individual turns into a majority shareholder of an organization by buying greater than 50 per cent of its shares. In such case, the bulk shareholder is required to pay the deemed acquisition tax at 2.2 per cent (inclusive of surtax) for actual property held by the corporate in proportion to the bulk shareholder’s holding within the firm, as if it has immediately acquired such actual property.
Tax exemption
If an funding automobile similar to a REIT or PFV distributes 90 per cent or extra of its distributable revenue as dividends, the disbursed dividend quantity could also be deducted from the revenue calculated for the related enterprise yr for tax functions. A REF is a pass-through entity and thus shouldn’t be taxable.
vi Cross-border issues and solutionsLand acquisition stories and actual property transaction stories
International traders who intend to amass land in Korea are required to file a report with the native authorities inside 60 days of execution of the related sale and buy settlement. International traders buying 50 per cent or extra of shares in a land-owning firm are required to file a report as properly. This reporting requirement could also be exempted if the international investor elects to file a normal actual property transaction report with the native authorities in accordance with the Actual Property Transaction Report Act.
International trade transaction report
Within the occasion {that a} non-resident international investor intends to amass actual property in Korea, she or he is required to file an actual property acquisition report pursuant to the International Change Transaction Act for the influx of international foreign money. These days, international traders have a tendency to not purchase home actual property immediately, however by means of funding autos. In such a case, the place international traders spend money on buying shares in funding autos as an alternative of buying actual property in Korea, they’re required to file a share acquisition report with a international trade financial institution designated below the International Change Transactions Act upfront with regard to the acquired shares.
Company actual property
Separation of company actual property from working firms or monetisation of company actual property often happens for the financing or restructuring of financially distressed firms.
The methods by which such financing or restructuring might be carried out embrace institution of CR-REITs as one of many forms of REITs, and issuance of asset-backed securities or asset-backed business paper and financing by way of holding a mortgage on company actual property. Moreover, there’s a sale and leaseback transaction by which a buy-back choice might be granted.
A CR-REIT is exempt from public providing necessities, a cap on the utmost possession of a single shareholder and the restriction on disposition of acquired actual property inside one yr. Nevertheless, it’s topic to a 5 billion received minimal capital requirement, is required to speculate 70 per cent or extra of its property in sure certified CR-REIT property (as outlined within the related rules), and can also be required to handle its property by means of an asset administration firm with fairness of seven billion received or extra and with 5 or extra asset administration professionals.
Outlook
In 2021, further new places of work, with a complete flooring space of 213,000 sq. metres, are anticipated to be provided to the Seoul workplace market, which is decrease than the typical provide quantity of the previous 10 years. The 2 main buildings that shall be constructed this yr are Centerfield Tower in GBD (whole flooring space of 171, 143 sq. metres) and Ok-Sq. Citi (whole flooring space of 41,634 sq. metres) in CBD.
With the expansion of e-commerce, the event and provide of logistics and distribution centres will proceed to broaden; it’s scheduled that roughly 6 million sq. metres are to be provided to the market in 2022. Owing to the fast progress of the marketplace for supply of recent meals that’s inflicting a rise in demand for low temperature logistics and distribution services, additionally it is anticipated that the provision of superior logistics and distribution centres, that are within the type of both a mix of current warehouse and low temperature services, or solely the latter, will enhance.
As talked about in final yr’s chapter, a latest notable market development in Korea is the utilisation of public providing REITs. The itemizing guidelines have been amended in December 2018 to facilitate the itemizing of public providing REITs and most of the people’s entry to actual property funding by means of REITs. Since then, a substantial variety of new public providing REITs have been efficiently listed within the Korean market. In 2020, a complete of six public providing REITs have been listed within the Korean market, and the newly listed REITS are diversified with several types of funding property similar to gasoline station, logistics and distribution centres, and rental homes, whereas in 2020 REITS have been primarily targeted on workplace buildings.
The provision of recent workplace buildings will seemingly proceed to say no from 2020 ranges, when there was a document excessive provide of 760,000 sq. metres across the YBD space, as there isn’t any information of major-scale workplace buildings being anticipated in 2022. Accordingly, as was the case final yr, hire is predicted to proceed to skyrocket whereas the emptiness price in main districts of Seoul will most likely go down to close 5 per cent.
With respect to logistics and distribution centres, an unprecedented scale of provide is scheduled in 2022, exceeding final yr’s new provide, within the Seoul metropolitan space. Such continued enhance in each the quantity and the size of recent logistics and distribution centres appears to be driving progress each in Seoul and areas in Incheon which are near the Incheon Worldwide Airport. Additionally, the provision in Ansung metropolis, the place the second Gyeongbu Expressway, which is at present below building, will move by means of, seems to be growing. Even below such enhance in provide, the demand for leases in such areas continues to extend; as an illustration, it’s mentioned that there are a lot of new lease contracts being signed even earlier than the completion of recent logistics centres, and additional that greater than 20 per cent of this yr’s lease provide has already secured tenants.
The 20 trillion actual property funding market appears set to proceed to broaden in 2022, notably together with an anticipated 3 trillion received IFC constructing (in YBD) transaction. Nonetheless, how the covid-19 state of affairs and the anticipated enhance in rates of interest have an effect on the market will should be watched.
Outlook and conclusions