Property Funds Emerge as New Investment Tools
Korea Times By Lee Hyo Sik June 7, 2005
Retail investors, fed up with low interest rates and volatile stock prices, are turning their eyes to a new investment instrument: funds investing in the property market. They are increasingly fond of propertylinked funds as direct real estate investment has become increasingly difficult in the face of stronger antispeculation measures led by the government.
The government has increased taxes on capital gains from real estate transactions to curb further rises in property prices.
A growing number of individual investors who subscribed to equity-type installment funds also began to notice relatively stable and high investment returns on the property funds, analysts said. About 14 brokers and asset management firms are currently managing about 90 propertyrelated investment funds, according to leading mutual fund evaluation company Zeroin. The amount stood at 2.06 trillion won ($2.06 billion) as of May 24, up from 144 billion won last June. ``An increasing number of investors are drawn to property-linked funds,’’ Lee Jae-soon, manager of a survey and research team at Zeroin, said. ``Those who think the stock market is too risky are joining the funds looking for more stable and higher returns.’’
These property funds yield a relatively high annual return of six to eight percent compared to the mid three-percent interest income by commercial banks. Investors can also indirectly invest in real estate with a small amount of money through the funds, Lee added. The most common type of property trust fund is project financing (PF), which lends money to real estate developers or construction firms for a certain period of time and receives interest from six to seven percent annually. ``The return on the PF-type fund is mostly higher than the interest on deposit accounts,’’ Kim Myong-hwan, manager of product development team at Daewoo Securities, said. ``Most securities and asset management companies managing the property funds take land or other fixed assets of developers as collateral. This means investors are protected from possible collapses of developers.’’ He said a number of investors flocked to buy the Daewoo’s PF-type fund last month, which financed the construction of an apartment in Seoul. ``Apartment construction projects are lucrative businesses these days so investors rushed to purchase our funds. They offer an annual return of 7.1 percent,’’ Kim said. The leading securities firm plans to come forward with more PF funds in the coming months. Woori Securities also successfully launched the PF-type fund financing the construction of a large discount store in Taejon city as investors were presented with an annual profit of 6.7 percent. Banks’ time deposits now offer interest of about 4 percent. There are also other types of the property investment trust funds. Higher Returns Brokerage and asset management firms have recently begun to market the funds that purchase real estate properties such as commercial buildings to lease for rent.
``This fund is a long-term investment scheme ranging from five to eight years. Local asset management firms currently set a marginal profit target at around eight percent, a bit higher than the PF-type fund,’’ Kim Seung-kil, a manager at Mirae Asset Management, said. He said that investors can receive additional profits besides rent when the fund expires as it could generate capital gains from selling purchased properties. Another type of property trust fund states that asset managers act as a real estate developer and carry out all development stages of constructing commercial buildings or apartments, which usually promises high returns. But it is riskier than the PF-type fund for investors to lose money if the project fails to make profits. Other asset management firms plan to introduce the fund that invests in overseas real estate properties as the government plans to ease rules restricting purchases of overseas properties to promote outbound investment in the future amid the record level of foreign exchange reserves. ``Local investors will be allowed to purchase real estate abroad through the property investment trust funds managed by the asset management firms when the government revises the law governing the overseas investments,’’ a senior manager at KTB Asset Management said. ``We expect many local investors to purchase our investment fund targeting profitable real estate properties, including commercial office buildings that will be available this month, in China’’ he added. Foreign asset management companies, including Macquarie IMM Asset Management, also plan to attract investors with a variety of property-based funds focusing on the United States and China. Check Points Analysts said that more investors will invest in property trust funds in the coming months as a safer and more profitable tool to avoid paying hefty taxes levied on real estate transactions and to generate higher returns than banks’ savings deposits.
``We predict that there will be a number of attractive property development projects in the capital region area as many construction companies will start reconstructing old apartment complexes in Seoul,’’ Kim of Daewoo Securities said. He added that a series of apartment construction complexes in cities near Seoul, such as Songtan and Hwasung, will also present great opportunities for investors interested in property development funds. ``Property funds will be attractive, given the shortage of other attractive investment destinations amid the sluggish economic conditions,’’ Kim Chul-bae, a senior manager of Asset Management Association of Korea, said. ``The funds will likely reach 3 trillion won by the end of this year. It could exceed that figure if we see a stream of new construction projects.’’ He added that the government’ comprehensive infrastructure investment projects to bolster the domestic economy will provide plenty of potential investment destinations for property funds. ``Some institutions will introduce funds that invest in the build-transfer-leases (BTL)-based public construction projects,’’ Kim said. However, analysts cautioned that investors should carefully consider a wide range of factors in the property investment plan, including the creditworthiness of real estate developers. ``They should first check who is behind the construction project and how sound their finances are. Promised returns could evaporate if the project fails to generate profits, unlike the fixed interest income from banks,’’ Kim of Asset Management Association of Korea said. He added that investors should also look at the value of collateral in case construction companies cannot make the payments stated in the investment fund. ``It’s important for investors to select property investment funds that finance businesses of reliable real estate developers or construction companies,’’ Lee of Zeroin said. ``Investors should also realize that they could lose some or all of their investment principal when the investment fails to produce profits.’’