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					Real Estate

The ever-increasing need for Korea to push harder with its restructuring
efforts is bringing more and more focus on asset values. More and more
companies are monetizing non-core business assets, realizing that to
maximize shareholder values, corporate funds are better deployed in the core
business, and not necessarily in real estate.


Real Estate Investment Opportunity in Korea
In an effort to induce foreign capital, the Korean government liberalized the
real estate sector to 100% foreign ownership in June 1998. Foreign
individuals and corporations (whether resident in Korea or not) are now
permitted to acquire land and buildings on the same terms and conditions as
Koreans. There are no restrictions on the purchase and/or use of land or
building by foreigners. Foreign property ownership of all property sectors is
permissible except for the acquisition of land located in the development-
restricted zone (greenbelt zone) such as military areas, cultural relics areas,
and ecological areas. Foreign investors also are eligible for long-term land
lease contracts of up to 50 years. The acquisition procedure was also
changed from one based on permission to one based simply on post hoc
declaration. However, as more and more foreign investors are finding out, an
equal footing with Koreans does not necessarily make real estate investment
a simple process. Since June 1998, there has been growing interest by
international investors, operators, developers and end users in the various
property sectors - hotels, prime and secondary grade office buildings, serviced
apartments, retail and industrial facilities.


The huge, and seemingly irreconcilable, price expectations between buyer
and seller narrowed in 1999, which allowed for some real estate trades to
occur. Acquisitions of plant facilities involved the transfer of real estate, and
some prime office buildings were acquired by international investors and
developers. However, the price gap still remains a significant deterrent to the
closure of deals. Sellers’ asking prices based on book values or inflated local
appraisal reports are still far away from the yield requirements of foreign
investors.



Development of Korea’s Real Estate Industry
In the past, the “Old School” of thought led the real estate market:
      Real estate prices would seldom decline.
      Those with money bought and amassed and rarely sold real estate.
      Large construction companies bought land to build apartments for sale.
      Large companies built office buildings, primarily for their own use.
      Real estate financing techniques were almost non-existent.
      And information concerning real estate transactions was difficult to
       obtain.


Experience has shown elsewhere that foreign investment in domestic property
markets contributes considerably to introducing transparency and structure to
what has long been a speculative market. New concepts of valuation,
management and financing have already begun to bring about enhanced
liquidity, greater accountability and more social responsibility to the real estate
process.


To foster a stable real estate market, AMCHAM recommends the Republic of
Korea Government (ROKG) take a comprehensive approach and develop a
long term Master Plan. Progress has been made in some areas, but faster
actions by the ROKG are desired. Money that is tied up in real estate needs
to be unlocked quickly to help fuel Korea’s overall restructuring efforts.
Introduction of new concepts and implementation of the following
recommendations would contribute greatly to the development and stability of
the Korea real estate market and enhance liquidity. AMCHAM recommends
the following action be taken:
    a.) Improve transparency of market transaction information
   b.) Improve leasing practices based on cash flow (away from chonsei)
   c.) Develop real estate financing laws to promote capital market access
   d.) Rationalize real estate tax system


A) Availability of Market Information
There remains criticism with regard to the generally poor availability,
transparency and dissemination of publicly available transaction data upon
which investment decisions can be made. The situation has improved since
1998 with a growing number of local and international real estate consultants
providing information to select clients. Information on auction award prices in
court foreclosures has been stored on databases since 2001. However,
generally speaking, the availability is still inconsistent at best.
Recommendations:
      The local brokerage community could make significant contributions
       here.     Brokerage fees are regulated, suppressing transparency.
       Allowing higher fee rates and the introduction of a “Multiple Listing
       Service” network where participating brokers share information on sell
       and buy requests and have pre-determined fee splits, would greatly
       improve the flow of information.
      Greater public access to real transactions data and improved
       dissemination of the same data by official sources. Some information
       is compiled and made available by the Korean government now, but it
       is aggregate data from which it is not possible to ascertain the identity,
       location and price of property transactions.
      It may be possible for the Korean government to retain the services of
       the consulting companies to compile official transactions data on a
       monthly basis to promote better investment decisions. In some areas in
       the U.S., real estate transactions are officially recorded on a database
       (buyer, seller, description of the real estate, price at which the real
       estate traded, date of the sale) and the public can access the data
       through the computer. It may be worthwhile for the Korean government
       to embark on such a project to induce more transparency into the real
       estate sector.


B) Leasing Practices
Korea has become ideally positioned to take advantage of this new
investment and leasing paradigm within the region. While there is evidence
that many landlords are willing to consider international style leases (to retain
existing and attract new tenants), many resist changing from the traditional
"chonsei " leasing practice (in the “chonsei” system, a lump sum is deposited
in lieu of rental payments. The leaseholder generates income through
investment of the deposit over the period of the lease). In July 2002, the
ROKG introduced the “Commercial Building Lease Protection Law” that
effective on November 1, 2002, moves up the enforcement date from January
1, 2003. This law will apply to the lease of commercial buildings for the
protection of the lessee from potential abuses by the lessor in terms of
increase of deposit and/or rent, early termination, refusal to renew, refusal to
return lease deposit, and refusal of registration of lease right.
Recommendations:
   Encourage the adoption of standard international leasing practices
     within the commercial property market in order to allow for a more cash
     flow-driven structure (for both development and lending practices).
   Government support for the development of financial products based
     on the cash flows of the property would encourage the use of more
     monthly rents as opposed to chonsei deposits.


C) Real Estate Financing - Link to Capital Markets
One of the major issues to address in developing a stable real estate market
in Korea is to develop financing tools. In the past, real estate lending based
on the cash flows generated by the property had been minimal. Banks
typically lent to businesses and just took the real estate as security collateral.
Government policy generally discouraged real estate lending because it
promoted real estate speculation and pushed prices higher and higher.
However, foreigners are allowed to have foreign loans or offshore funds
secured by the acquired property.


On the contrary, if properly managed, the introduction of real estate lending
based upon sound credit analysis of the cash flows generated by the property
and conservative loan-to-value ratios (with appraisals based more on the
income approach), liquidity and stability in the real estate market can be
enhanced. In fact, prices may come down and stabilize.


In addition to real estate lending, liquidity can be further enhanced by
promulgating laws to promote the development of real estate based products
for the capital markets. Korea enforced the “Asset Backed Securities Law”
and the “Mortgage Backed Securities Law” which have been mostly used to
securitize Non-Performing Loans transactions and a few real estate
transactions. The mortgage backed securitization market has only begun to
emerge while a mortgage system is in its infancy. And, in July 2001, the “Real
Estate Investment Trust (REIT) Law” became effective to promote REITs in
the real estate market. The Korean real estate financing market provides
opportunities for U.S. industry as foreigners’ portfolio investment in real estate
and property through the REITs.


The ROKG plans to enact the “Asset Management Business Law” in 2003,
with respect to the creation and management of investment funds. Under this
new law, the scope of the assets in which a fund is allowed to invest will be
broadened to include real estate property.



Recommendations
   AMCHAM recommends the ROKG take sweeping measures here. It
     should be done swiftly and effectively within the framework of a long
     term “Master Plan”.
   To introduce liquidity into the market, promote sound real estate lending
       practices by financial institutions, based on cash flows and
       conservative loan-to-value ratios.
      To promote residential and commercial mortgage lending, an
       adjustment in the Banking Laws and/or guidelines may be needed
       because the government historically discouraged real estate lending.
       This will nurture the primary market for real estate mortgages.
      To promote the development of the secondary market for real estate
       mortgages. It may entail a simple amendment of existing Asset Backed
       Securities (ABS), Mortgage Backed Securities (MBS), and REITs
       legislation or the enactment of new laws.
      Improve coordination among the Korean lawmakers and the Korea Tax
       Authority. Some laws with regard to the real estate sector are passed
       with minimal tax advantages.


D) Real Estate Taxation
The National Tax Authority (NTA) changed its name to the National Tax
Service (NTS) to emphasize “service” in 2001. This is an opportune time to
request “service” on coordinating tax breaks and rulings with the new laws
that are designed to promote investment by both local and foreign investors.


For example, the ABS Law was rather unclear and vague on its tax position
when it was first promulgated, mostly due to the lack of coordination with the
NTS. Uncertainties related to tax often inhibit and delay investment decisions.
Some foreign investors’ decisions have been delayed for months, and at times,
for more than a year, because of tax uncertainty.


The new REIT Law does not provide the “pass-through” of taxes to the end
investor, like the U.S. style REITs. This means that there will be double
taxation, severely inhibiting the development of REITs.
The NTC provides tax exemption and reduction as incentives for foreign
investment in real estate and property as follow:
National tax: 100% tax waivers of corporate tax and income tax for seven (7)
years, and a 50% tax reduction for an additional three (3) year term.


Local tax: 100% tax waivers of acquisition tax, registration tax, property tax,
and land tax for five (5) years, and a 50% tax reduction for an additional three
(3) year term. The land purchased by foreigners should be utilized for the
authorized business purpose within three (3) years from the date of
acquisition. Otherwise, the land shall be regarded as non-business use and
be subject to an acquisition tax.


Recommendations:
   Clarification of tax assessments on acquisition, retention and disposal
     of property. Make it easier to obtain tax rulings.
   The tax multiplier of 3 times or 5 times the acquisition/registration tax in
     cases where the property is located in the major Metro area may be
       prohibitive and should be eliminated.
      Eliminate punitive taxes for the holding of undeveloped land so as to
       eliminate eccentric and, in most cases, unnecessary real estate
       development.

				
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