Roughly four months after JR Global REIT filed for court rehabilitation, share prices of South Korean listed REITs and REIT exchange-traded funds have yet to rebound. The price declines have lifted dividend appeal, but analysts caution that the prolonged high-rate environment and unresolved credit risk across the REIT market warrant caution.
SK REIT (395400), the largest listed REIT in South Korea by net assets, closed at 5,330 won on the 3rd, down 2.38% from the previous session. That is 9.5% below its level at the start of the year, when it traded at 5,890 won. The stock had climbed through the year to a 52-week high of 7,090 won on April 27, then fell sharply the same day after news broke that JR Global REIT had filed for rehabilitation proceedings.
SK REIT slid to 4,800 won on June 8, its low for the year, before staging a modest rebound that month. It has since traded in a range of 5,300 to 5,800 won for about two and a half months. Although SK REIT's main holdings include office properties such as the SK Seorin Building and domestic gas stations, it could not escape the broader deterioration in investor sentiment.
Large-group sponsored REITs with lighter credit risk, such as SK REIT, Hanwha REIT (451800) and Lotte REIT (330590), have fared relatively better. The KRX Real Estate REITs Infrastructure Index, made up of 16 major Korean REITs and infrastructure funds, fell 19% from 1,472.72 on April 27 to 1,187.34 on June 5, and has been unable to break out of a 1,200 to 1,250 range for more than two months.
Investors who bought into the REIT sector through ETFs in search of steady dividends have also been left disappointed. TIGER REIT Real Estate Infrastructure, the largest REIT ETF by net assets, has returned minus 2.91% so far this year. KODEX Korea Real Estate REITs Infrastructure, the second largest by net assets, has returned minus 8.51%. JR Global REIT accounts for just 1.62% and 2.76% of the two funds respectively, but both posted negative returns as most individual REITs continued to underperform. PLUS K REIT, with a relatively high 4.5% weighting in JR Global REIT, returned minus 10.24% for the year to date.
Even as individual REITs have resumed public bond issuance in recent weeks, sentiment has been slow to improve, a trend attributed to elevated global sovereign bond yields that have raised concerns about falling asset values. REITs typically carry heavy borrowings to fund asset purchases, so higher rates push up interest costs. If asset values deteriorate, dividends can be cut.
Individual REITs are responding to the high-rate environment by selling existing assets and repaying debt, and the situation has not yet spread to a breakdown in dividend consistency. That leaves room for new investors to secure higher dividend yields than existing holders. TIGER REIT Real Estate Infrastructure, which pays distributions monthly, has paid 33 won per unit each month since the end of March last year, based on the payment record date. An investor who bought the ETF at 4,700 won in April would earn a monthly yield of 0.702%, while one who entered at 4,000 won last month would earn 0.825%.
With the rate path still uncertain, investors need to be selective, favoring ETFs weighted toward REITs with high credit ratings or REITs invested mainly in domestic assets. "The domestic REIT index has rebounded slightly, but the improvement is limited because there has been no major change in interest rates or the funding environment," said Lee Eun-sang, an analyst at NH Investment & Securities. "Amid rising credit risk in the domestic REIT market, the stable funding capacity of sponsored REITs is being reappraised."
