REIT Act Amended Too
by Brendon Carr
Sean Hayes’ Korean Law Blog reports something I noticed this summer but got too busy to post about: The Real Estate Investment Companies Act has been amended to activate the Korean real estate investment trust ("K-REIT") market. The amendment was passed in June and will be effective this month, October 2007.
The key reform? K-REITs now allow for a very respectable (some might even say reckless) amount of “gearing”—the maximum allowable debt limit has been raised from twice the invested capital to 10 times the invested capital. I’m not sure why this reform was deemed necessary, as REITs in other industrialized nations tend to have much lower gearing ratios between 20% and 40% of the invested capital. Allowing K-REITs to borrow 10 times their share capital could very quickly lead to out-of-control asset-price inflation as these huge funds start chasing the limited number of first-class properties available here.
Other reforms are aimed at easing the barrier to entry: Minimum capital has been reduced, and several changes have been made to allow organizers to form the K-REIT with a small capital investment initially, provided that additional capital and public participation are sought within a specified time limit.
Sean reports one thing that I believe might be misunderstood by readers: While the requirement for Ministry of Construction and Transportation (MOCT) approval has ostensibly been deprecated in favor of a “report”, make no mistake—MOCT will still exercise control. Korean government ministries are loath to give up any power, and MOCT is one of the most powerful.
When an approval requirement is downgraded to report or “notice”, but the report is still made to the Ministry rather than delegated to some agent (as in the case of foreign-investment reports, which are made to commercial banks rather than Ministry of Finance and Economy), the Ministry exercises its power by refusing to accept the submission of the report. A report which is never submitted need not be rejected. Oblique warnings are communicated to the applicant: If you put us on the spot by submitting that report we don’t want you to submit, we will make your life hell later.
It’s regrettable that this is the way they do business, but it’s the way they do business. Prospective K-REIT organizers will still need to curry favor with MOCT.
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