‘Project REITs’ Encompassing Development and Operations Stalled by Regulatory Gaps as an Alternative to PF

Extending beyond property investment into development and operations
No detailed rules for converting PFVs into project REITs
Deemed acquisition tax imposed upon title transfer during conversion

Although the government is promoting “project REITs (Real Estate Investment Trusts)” as a full-fledged alternative to real estate project financing (PF), market uptake has been sluggish. While the制度 has been formally introduced, the absence of clearly defined pathways and standards for converting existing PF projects into project REITs has led market participants to postpone execution decisions. In particular, the potential imposition of deemed acquisition tax during the conversion process has emerged as a key constraint on broader adoption.

Ministry of Land Approves Korea’s First ‘Project REITs’

According to the Ministry of Land, Infrastructure and Transport on the 13th, the government last month approved two REITs—“Dongtan Healthcare REIT” and “Cheonan Station Area Innovation District Regeneration Project REIT”—as Korea’s first project REITs following the filing of establishment notifications. The Dongtan Healthcare REIT involves the construction of 1,150 officetel units, 2,898 senior housing units, and an oriental medicine hospital in Mok-dong, Hwaseong. Established by MDM, the country’s largest developer, the REIT is being developed on a site of approximately 188,000 square meters acquired from the Korea Land and Housing Corporation, with a scale of eight basement levels to 49 above-ground floors. The total project cost is approximately $1.65 billion, with construction scheduled to begin in September next year and completion targeted around 2030.

The Cheonan Station Area Innovation District Regeneration Project REIT entails the construction of residential units (254 households), a knowledge industry center, and a transit parking facility in Wacheon-dong, Seobuk-gu, Cheonan, South Chungcheong Province. The project is capitalized by Cheonan City, Korail, and the Housing and Urban Fund. Upon completion, the residential units will be leased and operated by the REIT, while the remaining facilities will be sold. The total project cost is approximately $193 million. Construction is already underway, with completion scheduled for 2028.

Since the full-scale introduction of project REITs in November last year, more than 10 applications related to development and operation—such as dormitories and office projects—have reportedly been submitted to the Ministry of Land. Hanwha Solutions is pursuing a plan to convert new development projects worth approximately $3.76 billion, including AI data centers, eco-friendly R&D centers, and advanced industrial complexes, into a project REIT structure to attract external capital. Taekwang Group has formulated a strategy centered on Heungkuk REITs Management to contribute group-owned real estate in kind to REITs, thereby deferring taxation while simultaneously advancing new development projects. Coupang is also reviewing a plan to place its nationwide logistics center network into a REIT structure that integrates leasing, operations, and redevelopment.

Expectations for the activation of project REITs are spreading across the legal and financial sectors as well. Major law firms have established dedicated REIT task forces to provide integrated support covering structuring, taxation, and regulatory advisory services. Large accounting firms are also strengthening valuation and accounting advisory capabilities in this area. Financial institutions are exploring participation through loans, equity investments, and bridge financing. A real estate industry official noted that “once large corporations begin participating in earnest, the qualitative level of the REIT market will rise a notch,” adding that “funding stability, investor confidence, and industry infrastructure can be strengthened simultaneously.”

Project REITs Emerge as an Institutional Alternative to PF Distress

Project REITs were introduced as development-focused REITs with rationally eased regulations at the development stage, aimed at breaking the recurring vicious cycle of real estate PF. PF, which has served as the core funding mechanism for property development, has repeatedly triggered insolvency crises due to its low-equity, high-leverage structure. Developers typically finance only a minimal portion of total project costs with their own capital, relying heavily on financial institution loans and bridge financing for the remainder.

In practice, the equity ratio of PF projects is often below 5 percent. With such limited initial capital, there is virtually no buffer to absorb losses when unexpected increases in financing costs or sales shortfalls occur. As a result, projects become excessively dependent on external borrowing from the outset, and when interest rates rise or unsold inventory risks materialize, cash flows can rapidly tighten, undermining overall project stability. According to financial authorities, PF projects that have either become distressed or are at risk of distress amount to approximately $18.0 billion. About half of these are undergoing “restructuring” processes—such as maturity extensions, interest rate adjustments, additional capital injections, or revisions to business plans—to restore normal operations, while the remainder remain in negotiation stages, perpetuating uncertainty across the PF market.

In response, the government decided last year to amend the Real Estate Investment Company Act to introduce project REITs. Whereas conventional REITs focus on investing in completed assets and distributing rental income, project REITs adopt an integrated structure that assumes responsibility for development, leasing, and operations from start to finish. With equity ratios averaging 27 to 38 percent, project REITs reduce reliance on debt compared with traditional PF, enabling lower financing costs and enhanced development stability. Moreover, project REITs can proceed with land acquisition and construction through a simple establishment notification without obtaining a business license, and for five years after completion they may operate developed properties without fulfilling public offering or share dispersion obligations, or selling the assets. This allows sponsors to capture both development and operational returns, while retaining flexibility to divest assets at favorable timing.

“Expansion Will Remain Limited Until Tax Interpretations Are Clarified”

Despite these advantages, market participants report ongoing confusion due to unresolved tax risks and regulatory ambiguities. In particular, there are no detailed Ministry of Land rules governing the conversion of existing project finance vehicles into project REITs. A key issue is whether deemed acquisition tax applies. If a project REIT acquires shares of a special purpose company holding the asset, without a direct transfer of the real estate itself, deemed acquisition tax does not arise because there is no substantive change in property ownership. However, if the PFV contributes the property in kind to the project REIT or transfers it directly, an actual title transfer occurs, triggering a deemed acquisition tax of 2.2 percent. For projects targeting annual returns of 7 to 8 percent, the sudden imposition of a 2.2 percent tax can significantly erode profitability.

Differences in perspective between government ministries further complicate the issue. The Ministry of Land views project REITs as a means of absorbing distressed PF structures into the institutional framework and argues that unnecessary tax burdens should be avoided during structural conversions. By contrast, the Ministry of Economy and Finance emphasizes strict adherence to taxation principles and neutrality, maintaining that if there are changes in project sponsors or asset-holding structures, tax liability should be assessed based on substance rather than form.

With inter-ministerial differences unresolved, many in the market expect that on-the-ground application of project REITs will take time, potentially diverging from the policy’s original intent. An investment banking official commented that “project REITs are by no means a cure-all,” adding that “until tax interpretations are clearly settled, only a handful of pilot cases are likely to emerge, and large-scale expansion will remain constrained.” Skepticism also persists regarding whether project REITs can deliver the housing supply volumes the government hopes for. A professor of real estate studies observed that “even if housing market conditions have shifted somewhat, the prevailing mindset of rapid capital recovery remains intact,” adding that “it remains to be seen how active development REITs can become in an immature financial and capital market environment.”

Regulatory burdens associated with project REITs further add to market concerns. Reporting and disclosure obligations are significantly more stringent than those for PFVs. Quarterly project investment reports must be submitted to the Ministry of Land, and disclosure obligations arise in the event of defaults or rehabilitation filings by issuers of bonds held by the REIT, for investor protection purposes. Borrowing limits are also capped at twice equity, with an absolute ceiling of ten times equity even with special shareholder resolutions.

From a tax perspective, project REITs are not viewed as overwhelmingly advantageous. Beginning in January this year, the government amended the Restriction of Special Taxation Act to allow deferral of corporate taxes when land or buildings are contributed in kind to project REITs. However, market calls to revive previously expired acquisition tax reductions for REITs were not reflected in the amendment. Another real estate industry official noted that “while these measures are designed to protect investors, they inevitably reduce flexibility from a development standpoint.”