Govt losing plot over construction financing

By Kim Da-ye

Can investments into real estate be done without controversy?

Real estate investment trusts (REITs) emerged as an efficient alternative to directly purchasing properties and financing building projects, but the government decided last week to hold back the REIT market, which has been showing signs of disorder and corruption.

REITs are companies that invest 70 percent of their assets into real estate, manage them and return most of the profits to the investors.

The government initially believed that the introduction of REITs here would activate the housing market, help ordinary people invest in real estate with a relatively small amount of money and transform real estate speculation into a healthy investment based on solid information.

In 2007, it lowered the bar for entry into the market by changing the minimum required capital for setting up a REIT from 25 billion won to 1 billion won. The amount dropped to half a billion won in 2009.

Under the government’s umbrella, the number of REITs that invest and manage real estate on their own soared to 18 from just two in June 2009. Fifteen REITs are currently being screened for permission to run their businesses, according to the Ministry of Land, Transport and Maritime Affairs.

But the government has had to slam the brakes as investors’ confidence in REITs began plummeting when the permit for one company was revoked for malpractice.

Dasan REIT was forced to delist from the Seoul bourse when an auditor refused to give an opinion on its financial status.

The company had initially rejected the Korea Exchange’s (KRX) decision to delist, but later confirmed in a public disclosure that a former executive was responsible for issuing bills worth 20.82 billion won to pay back his own debts, embezzling a total of 23 billion won.

Golden Narae Real Estate Investment Trust is another business in a controversy because its owner allegedly bribed an official of the land ministry.

“There are concerns that investors’ trust in REITs is being damaged as some companies are being delisted due to moral hazard and poor management,” the land ministry said in a statement.

The ministry also found many of the REIT applications to obtain licenses showed little transparency on the feasibility of their business plans.

This year, the land ministry has already rejected three applications and cancelled one license as those REITs’ business plans were weak or they did not meet minimum requirements.