On January 12, 2022, the Ministry of Land, Infrastructure and Transport, the Financial Services Commission, and the Korea Fair Trade Commission jointly announced a plan called Better REITs Program to Promote Public Offering and Listing (“Better REITs Program”). In essence the Better REITs Program aims to (i) improve regulations by taking into account the special characteristics “REITs” as an investment vehicle, and (ii) increase public access by promoting their listing. The Better REITs Program will be pursued through an amendment bill to the Real Estate Investment Company Act, which will be proposed in the first quarter of this year.
The main features of the Better REITs Program are as follows.
Streamlined authorization and registration procedures for REITs
The Better REITs Program will streamline the authorization procedures for listed REITs: (i) discussion sessions with the Financial Services Commission/ Financial Supervisory Service will be removed, and (ii) discussion will be only required when filing a registration statement. Such simplification will address redundant review steps the REITs are subject to under the existing regulations. Further, REITs that meet the registration requirements under Article 9-2 of the Real Estate Investment Company Act, such as cases where institutional investors including pension funds acquire at least 30% of the issued stocks (“Qualified REITs”), will be exempted from business plan reviews, which will shorten the review period and expedite the overall registration process.
Increased the cap on investment ratio for pension funds, etc. by Qualified REITs
While exempting Qualified REITs from business plan reviews, as explained above, the investment threshold for institutional investors, such as pension funds, will be raised from 30% to 50% under the Better REITs Program. Also, under the proposed amendment, the current maximum 30% investment ratio in development projects by Qualified REITs can be lifted and adjusted at the discretion of REITs through the resolution of the general meeting of shareholders.
Deregulation of holding companies for fund-of-fund type REIT
Under the existing law, regulations governing holding companies under the Fair Trade Law also apply to fund-of-fund type REITs that are in a parent-child relationship when the parent-REIT has at least KRW 500 billion in assets and at least 50% of its assets are made up of the child-REITs’ stocks. The Better REITs Program recognizes the special characteristics of REITs and proposes that listed parent-REITs which fall under any of the following will no longer be subject to such holding company regulations to the extent the parent-REIT does not excessively concentrate its investment into a certain child-REIT: (i) when the parent-REIT does not hold stocks of general companies; (ii) when the capitalization does not involve any other third party other than the parent and child REITs; and (iii) when the parent-REIT does not belong to conglomerates.
Diversification of investment types to infrastructure assets, etc.
According to the Better REITs Program, the law will expressly state that REITs’ real estate asset investment portfolio can include social infrastructure (social overhead capital) projects aiming to generate profit from development or sale and rental income. Relevant regulations will be also added or revised to allow REITs to make investment in the form of loans to SOC project contractors which are commonly used when investing in infrastructure.
Supplementation of conflicts of interest related provisions
The Better REITs Program proposes to further supplement the regulations to prevent potential conflicts of interest situation by prohibiting an AMC from holding more than 30% of interest in a REIT entrusted with its work and limiting transactions between the AMC and the AMC’s entrusted investment vehicles (REITs, funds, PFVs, etc.).
However, the Better REITs Program does not include detailed plans to improve upon the current conflicts of interest related provisions. There has been a few queries recently in the industry in the legal interpretation of whether or not selling a fund asset managed by an AMC to a listed REIT operated by the same AMC constitutes a form of cross-trading or otherwise subject to the regulations concerning interested-party transactions. It would be interested to see how the regulatory authorities will address the above issue when the details of the legislative proposal for the amendments are announced in due course.
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