Project REITs boost real estate development in South Korea

In recent years, the expansion of real estate Project Financing (PF) defaults in the secondary financial sector and the sequential bankruptcies of small and medium-sized construction companies have become a prominent issue in South Korea. As the risks of real estate PF defaults continue to escalate, various improvement measures are gaining significant attention.

The root of these issues is the long-standing structure for PF funding. Under this traditional model, developers commit minimal equity capital—typically just 3% on average (Source: KDI, June 2024)—while securing loan financing for the remaining investment. This structure relies heavily on construction companies with strong credit ratings to provide loan guarantees. While successful projects can generate substantial returns, failed ventures bring financial burdens to construction companies, financial institutions, and ultimately to individual property purchasers. The low equity ratio, combined with vulnerability depending on the real estate cycle and fluctuating interest rates, has accelerated defaults throughout the PF market.

In response to these challenges, on May 1, 2025, the National Assembly passed an amendment to the Real Estate Investment Company Act, introducing Project REITs. This new framework integrates real estate development and operations under a unified structure, while the traditional REITs model primarily aggregates capital from multiple investors to acquire properties and distribute profits to shareholders. Project REITs extend this model by assuming responsibility for not only real estate investment but also development and operation.

The fundamental difference between Project REITs and traditional REITs lies in their distinct regulatory frameworks applied separately during development and operational phases. To speed up the process, regulations for Project REITs are relaxed during the development phase. Reporting and disclosure obligations are then applied during the operational phase after development completion to protect general investors. For example, during the development stage, Project REITs are exempt from stock public offering and distribution requirements. Additionally, most other reporting and disclosure obligations are waived, simplifying the reporting requirements to just the submission of business investment reports.

Furthermore, Project REITs benefit from a streamlined launch. Unlike general REITs, which require business authorization or registration, Project REITs can commence real estate development activities—including land acquisition and construction—with just an establishment report. Once development is complete, it must secure business authorization and registration by the date specified by presidential decree. A public offering must then follow within five years from the date of receiving that authorization and registration.

Figure 1: Differences between Project REITs and General REITs

Source: The Ministry of Land, Infrastructure, and Transport (MOLIT)

Under the previous approach, development projects were executed through project financing vehicles (PFVs) and then completed assets were acquired by REITs. In contrast, project REITs enable swift funding from acquisition to construction costs through a single REIT vehicle. Furthermore, Project REITs have a borrowing limit of two times their equity capital (or up to 10 times with a special resolution at the shareholders' meeting), ensuring more stable development compared to PFVs. To further improve financial structures and expand a stable supply through enhanced REIT investment activity, the amendment also allows existing REITs to convert to Project REITs.