As the financial authorities strengthened the conditions for maintaining listings with the goal of eliminating 'zombie corporations', it has been determined that real estate investment trusts (REITs), which receive dividends through real estate investments, are not included in this regulatory strengthening.
Recently, the REITs market has seen repeated negative issues, such as failure to meet sales requirements and embezzlement. In this situation, there were concerns in the industry that if REITs fall under the strengthened listing maintenance conditions, there would be a flood of delisted REITs. However, as the regulatory pressure has eased, operators appear to be taking a sigh of relief for now.
On the 18th of this month, the Korea Exchange released a revised draft of the 'Regulations for Maintaining Listings on the KOSPI and KOSDAQ Markets'. This is a follow-up action to the 'IPO and Listing Deregulation Improvement Plan' announced by the Financial Services Commission earlier this year. According to this draft amendment, the government did not include REITs in the subjects of strengthened listing maintenance conditions.
In the improvement plan announced at the beginning of the year, the financial authorities stated that by 2029, the annual sales standards would be raised from 5 billion won to 30 billion won for the KOSPI market and from 3 billion won to 10 billion won for the KOSDAQ market. The Financial Services Commission estimated that if the listing standards are strengthened, about 8% of the KOSPI market, or 62 items, and about 9% of the KOSDAQ market, or 137 items, would fail to meet the minimum requirements.
After this improvement plan was announced, tension in the REITs industry increased. Among the 24 currently listed REITs, 7 have annual sales (operating revenue) that fall short of 30 billion won. A source in the REITs industry said, “If the strengthened listing maintenance standards are applied, there will be several REITs that will inevitably face delisting.”
Since the exchange has managed listed companies and REITs separately, it decided not to apply the new regulations uniformly when revising the listing regulations. A source from the exchange said, “REITs operate as a fund that collects investor money to generate revenue through dividends, which differs from general listed companies. Considering the unique characteristics of REITs, they were excluded from the subjects of the strengthened listing maintenance conditions.”
REITs have a structure that allows them to generate revenue solely through dividends from rents and development profits from real estate projects. While general corporations have means to increase revenue, such as new businesses, to meet listing maintenance conditions, REITs lack proper means to increase revenue. This is why there are concerns in the industry about a 'mass delisting' situation. To increase rental revenue, large-scale capital must be invested to secure assets and real estate development projects can take nearly four years to yield results.
Although they have avoided the knife of strengthened listing regulations, it seems that management and supervision by the financial authorities will be further strengthened due to the series of adverse events in the REITs industry.
AREITS, the first listed REIT in Korea, was designated as a watch item last year after failing to exceed the listing maintenance condition of 5 billion won in annual revenue for two consecutive years. The revenue condition for maintaining the listing of a REIT is 5 billion won if the real estate development project's assets exceed 30%, and 3 billion won if they are below that.
AREITS reduced its real estate development project assets to within 30% in March and lowered the listing maintenance condition to 3 billion won, and sold assets to increase revenue to over 3 billion won. However, the eligibility review for listing continues, and trading of its shares has been suspended until now. AREITS has until the 21st of this month for its improvement period.
STAR SM REIT faced the risk of delisting in February of this year due to embezzlement and breach of trust by its management. The damage is estimated to be around 7 billion won. Last year's business audit report received refusal of audit opinions from external auditors, leading to a suspension order from the Ministry of Land, Infrastructure and Transport and a delisting review from the exchange. STAR SM REIT plans to sell management rights to normalize its operations and intends to file for a provisional injunction against delisting.
The Ministry of Land, Infrastructure and Transport recently conducted special inspections targeting major REIT management companies. As a result, it is reported that two REITs received management improvement measures.