Korean REIT stocks struggle to attract investors amid uncertainty

[Photo by Park Hyung-ki]

Real estate investment trust (REIT) stocks in South Korea that allow investors to invest in real estate properties are losing steam as they deliver unfavorable returns amid growing uncertainty in the financial market.

According to the Korea Exchange on Thursday, the KRX REITs Top 10 Index lost 5.12 percent this year and the KRX REITs Infrastructure Index 0.61 percent. Among the 23 REITs listed on the local stock market, only 7 have gained, including the K–TOP REITs Co. (8.14 percent), NH Prime REIT Co. (3.71 percent), and JR Global REIT Co. (3.56 percent).

REITs invest in real estate or stakes in real estate and distribute returns to their investors based on the gains made from the investments. They have been facing downside pressure recently, however, due to the chilled real estate market sentiment.

Interest rate hikes by the U.S. Federal Reserve have put pressure on raising funds and the project financing market has been stagnant amid the credit crisis triggered by the default crisis involving Legoland Korea. The collapse of Silicon Valley Bank has also led to a liquidity crisis.

Korean REITs are performing weaker than global REITs.

Among the REIT exchange-traded funds (ETFs) listed in the local market, ACE Singapore REITs and KBSTAR Global Data Center REITs-Nasdaq ETF-Synth Fund rose 12.82 percent and 9.59 percent, respectively. The TIGER KIS Real Estate Infrastructure Bond TR ETF that is composed of Korean REITs, however, lost 1.24 percent.

Hanwha Reit Co. and SamsungFN REIT Co. recently joined the market but they have been hovering near the offering price.

SamsungFN REIT, Samsung Group’s first REIT, gained expectations with its prime real estate properties located in some of the busiest office districts in the country, including Daechi Tower in southern Seoul, and S-One Building near Seoul City Hall. Hanwha REIT promised a 6.85 percent annual dividend payout from its rental income in buildings owned by major Hanwha Group affiliates.

Analysts point out that the two REITs have a relatively high 5 percent annual rate for loans and that Hanwha does not include the group’s core assets such as the 63 Square building in Yeouido.

“We listed at a time when interest rates were high,” said an unnamed official from Hanwha Asset Management Co. “Investors can expect more as loan rates will go down and the dividend yield will go up following the refinancing.”

Some analysts, in the meantime, present a rosier outlook on REITs, saying that a rebound in the second half of the year is possible if interest rates remain unchanged in 2023.

“Although REIT prices have undergone a correction amid interest rate hikes, that is also an opportunity to sell distressed properties and buy prime assets,” said Kim Sung-hoon, head of the ETF department at Hanwha Asset Management. “Now is actually a good time to invest, as rents will rise and dividends and stock prices will follow the recovery.”

“The average price to funds from operation ratio (P/FFO) of the top 10 listed REITs by market capitalization in Korea stands at about 16, far undervalued compared to the U.S. REITs at about 20 and Japanese REITs at about 19,” according to NH Investment & Securities Co. “Because inflation last year is going to be reflected in rental incomes this year, and transactions occur on properties that must be sold due to maturity, the cap rate, a property’s net operating income to the asset value, will rise.”