JIPYONG LLC

Introduction

Seoul’s commercial real estate market has experienced significant growth, with investment activity accelerating in recent months.  According to a report released by CBRE Korea, a commercial real estate services firm, total commercial real estate investment volume in Korea for Q3 2024 reached approximately KRW 6.6 trillion, representing a 43% increase from the previous quarter.¹  Against this backdrop, recent amendments to the Enforcement Decree of the Real Estate Investment Company Act (“Enforcement Decree”) introduce substantial regulatory changes aimed at enhancing compliance, expanding investment opportunities, and strengthening investor protections.  These changes are expected to streamline operations for real estate investment companies (“REICs”) and ease regulatory burdens, particularly for foreign investors and stakeholders.


1. Adjustment to the Calculation Method for Constituent Assets

Prior to amendment of the Enforcement Decree, REICs were required to ensure that at least 70% of their total assets comprise real estate, including buildings under construction, after meeting minimum capital requirements.  Under the amended Enforcement Decree, REICs are now permitted a broader scope in calculating the 70% real estate asset requirement, as the definition of real estate assets has been expanded to include all investments in land, public waters, and structures or facilities installed in buildings.²  Notably, infrastructure facilities previously classified as either movable or immovable property under civil law are now treated as real estate for asset calculation purposes.  Additionally, Article 27, Paragraph 1, Subparagraph 10 of the Enforcement Decree has been amended to allow the Minister of Land, Infrastructure and Transport to designate additional asset type as real estate through the Minister's official notice.

This provides greater flexibility and adaptability in asset classification.  Furthermore, entry deposits received from residents of elderly residential welfare facilities under the Elderly Welfare Act are now excluded from financial institution deposits when calculating asset composition.³  This change stabilizes the asset composition ratio, reducing the risk of non-compliance due to fluctuations caused by the return of these deposits.


2. Enhanced Investor Protection Through Compliance Oversight

The amendments place a strong emphasis on investor protection by increasing transparency and regulatory accountability.  Self-managed, trustee-managed, and corporate restructuring REICs are now required to disclose additional information in their quarterly investment reports, specifically regarding the appointment and dismissal of compliance officers within both the REICs and their asset management companies.  This measure is designed to ensure greater transparency in governance to bolster investor confidence.


3. Regulatory Exemptions for Minor Business Changes

To reduce administrative burdens, the amendments introduce exemptions from regulatory approval for certain minor business changes.  Adjustments such as updates to the company name, registered office location, or amendments to the Articles of Incorporation regarding asset custody in management outsourcing agreements no longer require formal approval or registration.  Instead, these changes only need to be reported to the Minister of Land, Infrastructure, and Transport, streamlining processes and minimizing unnecessary delays in business operations.


4. Eased Eligibility Criteria for Major Shareholders

The eligibility criteria for major shareholders of REICs have also been relaxed to foster industry consolidation and support the growth of larger asset management firms.  Previously, investors holding 10% or more of a REICs capital were disqualified if convicted of certain financial crimes, competition law violations, or tax offenses resulting in a criminal fine or greater penalty within the past five years.  The new provisions introduce a more lenient threshold for companies undergoing mergers, demergers, or corporate spin-offs, now disqualifying investors only if the penalty imposed exceeds KRW 500 million.  This adjustment is intended to facilitate market expansion and increase investment stability.

The following is a summary of the amendments and implications of the Enforcement Decree:
 

Changes	Amendments	Implications
1. Adjustment to the Calculation Method for Constituent Assets	“The scope of real estate assets now includes investments in land, public waters, and structures/facilities installed in buildings. ” Article 27 amended to include “amounts similar to those specified in Subparagraphs 1 to 9, as determined and announced by the Minister of Land, Infrastructure and Transport” Entry deposits from elderly welfare facilities are excluded from financial institution deposits in asset calculations.	Allows for a broader scope of asset calculation. Simplifies compliance by stabilizing asset composition ratios, reducing the risk of falling below the 70% requirement and ensuring more consistent adherence to regulations (Article 27, Paragraph 1, Subparagraph 9).
2. Enhanced Investor Protection Through Compliance Oversight	Self-managed, trustee-managed, and corporate restructuring REICs must now disclose additional information on compliance officers' appointment and dismissal in quarterly reports.	Increases transparency and regulatory accountability, ensuring stronger investor protection by making governance practices more visible to investors (Article 37(1)).
3. Regulatory Exemptions for Minor Business Changes	Certain minor business changes no longer require approval or registration, only requiring notification to the Minister of Land, Infrastructure and Transport.	Reduces administrative burdens and streamlines operational processes for REICs, facilitating smoother business adjustments and minimizing unnecessary delays (Article 27, Paragraph 3, Subparagraph 3(b)).
4. Eased Eligibility Criteria for Major Shareholders	The disqualification threshold is raised to a penalty exceeding KRW 500 million, applying only in cases of mergers, demergers or spin-offs.	Facilitates the growth of larger asset management firms by relaxing eligibility requirements for major shareholders (Presidential Decree No. 35103).

Conclusion

The recent amendments to the Enforcement Decree of the Real Estate Investment Company Act represent a significant step in modernizing Korea’s real estate investment framework.  By introducing greater flexibility in asset allocation, reducing regulatory burdens, and enhancing investor protection, these changes contribute to a more efficient and transparent investment environment.  Foreign investors seeking to enter or expand within Korea’s commercial real estate market will benefit from these updates, as they create a more accommodating regulatory landscape.  As the sector continues to grow, it is essential for investors to stay informed and adjust their strategies to take full advantage of the evolving legal environment.
 

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