Government Introduces Financial Real Estate Measures

According to government documents on real estate measures acquired on August 1, the Uri Party and the government are preparing the following policies in the finance category in addition to policies related to restraining demand and expanding the supply of real estate.

Real estate policies in the finance category consist of: introducing tax preference long-term reserve funds, relaxing regulations on investment raising conditions for private equity funds, allowing the establishment of professional asset investment companies, and the activation of long-term real estate funds and REITs (Real Estate Investment Trusts).

Taxation Benefits to Long-Term Reserve Funds-

According to government documents, short-term real estate funds floating in the market as of the end of June amount to 421 trillion won. Government authorities judge that unless the flow of this money is turned around, real estate policies will not be able to show their proper effects.

To begin with, authorities are examining the prospect of giving taxation benefits such as tax deductions or tax reductions to long-term reserve funds, an indirect stock investment product.

Securities companies have asked the government for an income tax deduction or to reduce taxes on certain amounts during year-end settlements or during the reporting of total income for those who deposit up to 12 billion won in a three to five year long-term securities savings account for more than three years.

An official at the Ministry of Finance and Economy said, “Certain sources object to the necessity of introducing tax preference long-term reserve funds, but there are few objections within the government to the fact that it is necessary to control the flow of real estate funds.”

Support for Indirect Investment Products such as Real Estate Funds-

The government is also preparing a measure to absorb real estate speculation in a financial product that will bring speculation funds to light.

This is receiving positive reviews in that it could clear initial funds for real estate development that are needed in lease apartments, increasing post-lotting, and introducing public development methods.

For this, the government is considering a revision of the current regional tax law that imposes a progressive tax by adding real estate held by real estate funds, and to impose taxes individually according to that fund.

Currently, real estate that is the investment of real estate funds is considered the property of asset investment companies. Therefore, the more the real estates fund, the bigger the burden on the company.

In addition to this, the government is planning to relieve the “obligatory investment clause” which requires the private equity fund to invest more that 60 percent of the contribution funds within a year in stocks for the purpose of a merger or participation in management, to allow the expanding of products for investment.

Fixing an insurance law that prevents insurance companies from contributing more than 15 percent to a private equity fund in order to make participation in those funds easier for insurance companies, is also being considered.

Home Mortgage Loan Total Amount Policy Won’t Be Implemented-

The government agreed to continue the restriction policy on loan-to-value ratio, but will “avoid excessive restrictions because it is difficult to tell whether a loaner is a speculator or an actual consumer, and also in consideration of the middle class who mortgage their homes for money to work and live.”

The total amount policy, which sets a limit on home mortgage loans based on the individual, will not be implemented because it is difficult for financial companies to know the loan details of each individual.

Increasing interest rates are not taken into consideration because they “have the danger of contracting investment and consumption by burdening companies and households.”

In Need of Financial Measures but Unsure of Their Effects-

Experts agree that a financial category should be included in real estate policies.

Economics professor Kim Kyung-hwan of Sogang University said, “Taxation benefits for reserve funds will increase the liquidity of the stock market and benefit the current prosperity of the stock market,” adding, “I am also positive about the activation of real estate funds in that it makes petty investments in real estate possible.”

However Im Kyung-mook, a researcher at Korea Development Institute, said, “Government policies could bring the short-term effect of real estate funds flowing into the capital market, but there is a need for the settlement of a fundamentally transparent system in the asset investment market,” adding, “Without the trust of investors, government policies are merely short-term measures.”

Chi-Young Shin Chang-Won Kim higgledy@donga.com changkim@donga.com