Corporate Real Estate: South Korea
A Q&A guide to corporate real estate in South Korea. This Q&A is part of the PLC multi-jurisdictional guide to corporate real estate. For a full list of jurisdictional Q&As visit www.practicallaw.com/realestatehandbook.
The corporate real estate market
With the economy recovering more quickly than expected and a more active investment market than anticipated, transaction volume has increased in 2009. This trend is predicted to continue in 2010, according to many real estate investment surveys. Local investors, including wealthy individuals and local pension funds who seek a stable return on investment, are participating more actively in the market. However, the currently capped interest rates may be unattractive to other opportunistic investors. There is continuing interest in investment from foreign core funds seeking long-term returns, particularly in the commercial building sectors in the:
Seoul Central Business District.
Yeouido Business District.
Kangnam Business District.
The bidding process to acquire these buildings remains highly competitive.
Some of the most significant deals in the last 12 months include the:
Acquisition of a 50% ownership interest in Center1 Building in Seoul from Bank of America Merrill Lynch by a Korean real estate fund established by Mirae Asset MAPS Global Asset Management Co Ltd. for about KRW550 billion (as at 1 September 2010, US$1 was about KRW1,200).
Acquisition of the Samsung Headquarter Building in Seoul by Samsung Life Insurance Company for about KRW504.8 billion.
Acquisition and leaseback of Newcore Gangnam Outlet Store in Seoul by a GIC-owned real estate investment trust (REIT) for about KRW220 billion.
With relatively low interest rates and a competitive commercial building sector, the development and construction of major landmark complexes and buildings have become a major trend since 2004. This has been driven by private sector investors and local governments wishing to:
Undertake high profile real estate developments.
Attract foreign direct investment.
Accommodate the business interests of international and local developers.
Keep up with public demand.
The value of these large-scale developments and construction projects currently totals about KRW120 trillion, including the:
International Business Complex Project in Yongsan (about KRW31 trillion).
Alpha Dome City in Paju (about KRW5 trillion).
Digital Media Centre Project in Sangam-dong (about KRW3.3 trillion).
However, since the global economic crisis in 2008, many of these large-scale development projects have encountered difficulties in obtaining financing for land acquisition and development costs.
Real estate investment
The structures commonly used (for example, property companies and partnerships).
Are real estate investment trusts (REITs) available? If so, are they commonly used?
Governmental authorities have continued to provide increasingly more flexibility into tax efficient real estate investment structures that are favourable to foreign investors.
However, additional regulatory clarity and consistency is needed in certain areas, due to the lack of precedents on specific issues.
The following investment structures are commonly used:
Project finance vehicles (PFVs). Under the PFV structure, a financial institution must hold at least 5% of the equity interest. The PFV is the most popular structure for development projects due to its various tax benefits (see Question 19).
Asset-backed securitisations. (ABSs). Despite its stringent legal and internal regulatory requirements such as "originator" qualifications, this structure continues to be one of the structures considered to acquire commercial buildings due to its various tax benefits (see Question 19).
Real estate investment trusts (REITs). REITs are available in South Korea and provide tax-efficient investment structures for investors. However, they have not been as active in South Korea as Singapore REITs (S-REITs) or Japanese REITS (J-REITs).
Among the REITs recognised under the REITs Act, private investors most commonly invest through corporate restructuring REITs (CR-REITs), which can only invest in real estate assets sold by companies undergoing restructuring. This is because unlike other types of REITs, CR-REITs are exempt from the public offering requirement and allow a higher percentage of ownership by a single owner. With the increase in the number of companies undergoing restructuring to recover from the recent economic downturn, investment opportunities for CR-REITs are also expected to increase.
In addition, recent amendments to the REITs Act announced in 2010 aimed at boosting the recovery of the real estate market and promoting the use of REITs have made REITs even more attractive to investors. These amendments include:
a reduction in a REIT's minimum required paid-in capital at establishment and during operation;
shortening the restricted period for the disposal of commercial property (from three years after the acquisition to one year after the acquisition);
a reduction from 30% to 20% in the minimum percentage of shares required to be publicly offered by a REIT (other than CR-REITs, which are not subject to any public offering requirement);
an increase from 30% to 35% in the maximum percentage of shares owned by any single REIT shareholder (other than CR-REITs, which are not subject to any maximum ownership caps).
Real estate funds (REFs). The Indirect Investment Asset Management Business Act, which regulated REF structures, has been replaced by the Financial Investment Services and Capital Markets Act (FSCMA), which provides for increasingly diverse real estate financing and investment methods. The trust-type REF has been the most commonly used REF structure due to the relatively simple governmental approval process, because the structure does not involve incorporation of an entity. Among the company-type REFs, the yuhan heosa (limited liability company) type is gaining interest among foreign investors.
The various tax benefits and increasing flexibility afforded to the asset-backed securitisation (ABS), REIT and real estate fund (REF) structures in response to investors' demands have encouraged investors to increase their use of these special investment structures.
The following types of investor are active in the corporate real estate market:
Institutional investors, such as:
life insurance companies;
other public organisations.
Private investors, such as:
real estate funds;
private equity funds.
Domestic and foreign companies.
Wealthy Korean individuals.
Real estate legislation
The main real estate legislation includes the:
Real Estate Registration Act, which regulates court registration of these real estate rights.
National Land Planning and Use Act, which deals with administrative regulation on the zoning and use of land.
Building Code, which outlines procedures related to construction and building use.
There is also specific legislation for particular situations, such as the:
Industrial Complex Act, which regulates the development and use of industrial complexes and the establishing of factories.
Act on Free Economic Zone, which provides for special treatment of real estate located in free economic zones. These are designated areas which provide certain tax benefits to qualified investors.
Act on Foreigners' Land Ownership, which regulates certain procedures required for the acquisition of land in Korea by foreign persons.
There is a dual title registration system for land and buildings on land, which constitute separate real estate in South Korea. Therefore, to construct and own a building on a parcel of land, the owner of the building must either:
Own the underlying land outright.
Have a leasehold interest or a superficies right over the land. A superficies right is the right to use the underlying land in order to own the structure which is on the land, but without holding the ownership interest of the land.
In addition to separate title registries, the local government maintains separate ledgers for land and the buildings on them. Certain administrative information concerning real property is shown in the ledgers.
The relevant local court registry office manages the real estate title registry. Registration in the register is generally required to perfect a transfer of title to real estate (except for transfers which arise by operation of law). Registration of title constitutes prima facie evidence of title.
The order of priority among interests in real estate (including security interests) is determined by the order of registration with the court office. In addition, certain statutory liens, such as tax claims by the government, have higher priority over registered security interests.
The most important information shown in a real estate title registry is the:
Description of the real estate, such as the size and designated usage.
Name and address of the owner.
Sales price in case of ownership transfer by sale and purchase.
Acquisition date of ownership.
Type, holder and date of encumbrances.
The underlying documents under which title is transferred or a security interest is created are not publicly available. These documents are submitted to the court registration officer to register the existence of the relevant interest in the real property.
The information set out in the title registry is public information. However, the underlying documents transferring title or creating a security interest are not publicly available (see Question 6).
The state does not guarantee title. Title insurance is available but has not been widely used. However, the importance of title insurance, title searches and due diligence on title is becoming apparent since relying solely on the public title registry is not guarantee of title. It constitutes prima facie evidence of title (see Question 5).
The only freehold ownership right is complete ownership, which is similar to the Anglo-American law concept of fee simple absolute.
The partial estates recognised in Anglo-American law do not exist under South Korean law, such as:
Life estates (ownership valid only during a certain person's lifetime).
Future interests (ownership valid from a certain point or contingency in the future.
A widely used form of joint ownership is tenancy in common (Gongdong Soyu). Depending on the relationship among the joint owners, tenancy in common can be divided into:
Gongyu. In a Gongyu situation, which typically arises in the event of inheritance of an estate, two or more persons share an undivided interest in real property. Because none of the joint owners are related to one another, other than as joint owners, each has fully independent control over its own portion, and each joint owner may sell its share freely. In the downtown Seoul area, there are a number of plots of land owned under a Gongyu tenancy.
Hapyu. In a Hapyu situation, the joint owners own the property as a partnership. Therefore, one joint owner requires the other joint owners' consent to transfer its portion of the ownership. Until the partnership is dissolved, one joint owner cannot request separation of its interest in the jointly owned property.
Chongyu. A Chongyu situation is widely used by religious organisations holding real property. In a Chongyu situation, the disposition of the real property requires consent of the members of the church.
Of the three forms of tenancy-in-common, Gongyu is the most popular and widely used, while Hapyu and Chongyu are used rarely and only in special circumstances. There are three types of leasehold interest:
A chonsei lease, which is a type of leasehold interest unique to Korea. In a chonsei lease, the tenant gives a lump sum refundable deposit (that is, a key money deposit, which is essentially an interest free loan) to the landlord at the beginning of the lease term. This is in exchange for a reduction or elimination of the periodic rental payments. At the end of the chonsei lease term, the principal amount of the key money deposit is returned to the tenant. Periodic rental payments, if any, are not returned.
A monthly lease.
A pre-paid rental lease.
These leasehold interests are created contractually. However, a leasehold contract does not, in itself, secure the return of the deposit on expiry or termination of the lease. The contract does not guarantee the use of the leased premises for the entire lease term if certain adverse events take place (such as on transfer of the property by the owner during the lease term). To protect these rights, the tenant can register its leasehold right with the relevant court office. In addition, certain small or residential leases receive additional protection under the Commercial Building Lease Protection Act and the Housing Lease Protection Act.
Superficies rights and easements can also be created contractually, and in certain cases, by operation of law.
Sale and purchase of real estate
How is real estate marketed, when does commercial negotiation occur and what pre-contractual arrangements are used?
When is the sale contract negotiated and executed?
When are the parties legally bound?
When is the change of title registered?
When does title transfer and what are the formal legal requirements to transfer real estate (for example, in writing and signed by the parties)? Is notarisation required?
An estate agent usually markets the real estate and acts as the broker between a buyer and seller.
The parties usually conduct the commercial negotiations, assisted by realtors. Lawyers are usually involved during the negotiation of large commercial real estate transactions and most real estate transactions involving foreign parties.
Parties sometimes enter into a pre-contractual memorandum of understanding, setting out the key terms and conditions of the property sale and purchase. The memorandum of understanding can be legally binding or non-binding.
In a typical real estate transaction, a sale and purchase agreement is the main transaction document.
When legally binding
Parties are legally bound on execution of the sale and purchase agreement or a binding memorandum of understanding.
The relevant court office issues a certificate of registration (Dungki-Pil-Jung), which is equivalent to a title deed. This certifies that ownership has been registered.
When title transfers
Title transfer for real property is effective on registration in the relevant registry of real property by the court office (see Question 5). For a title transfer registration application, the court registry office must receive the following documents:
A written contract for transfer of title, such as the sale and purchase agreement.
The seller's certificate of registration.
A power of attorney to apply for title transfer registration issued by the seller.
The seller's certificate of seal impression issued by local government authorities. In South Korea, a person's seal is commonly used as a method of verification or authentication of his written decisions. The certificate of seal impression proves that the seal has been legally registered.
Notarisation of these documents is not required.
The Civil Code provides for an implied warranty from the seller relating to defects (such as soil contamination or buried waste). The warranty can be contractually overridden or amended. However, if a seller knows of a defect but does not disclose it to the buyer, the seller is liable for this defect, even if the buyer waived warranties in the sale and purchase agreement (Civil Code).
Legal due diligence typically comprises the following:
Verification of ownership through title search and review of title registry.
Identification of any registered or unregistered encumbrances on the real estate.
Verification of compliance with relevant laws and regulations concerning construction and the use of real estate.
A review of material contracts entered into in relation to the use and management of the real estate (such as leases and property management agreements).
Identification of any restrictions on use or disposition of real estate (whether statutory or contractual).
A seller does not typically give any representations or warranties in relation to defects. Real estate is generally sold on an "as is" basis.
However, where foreign entities or domestic financial institutions are involved, parties typically provide standard representations and warranties seen in international transactions.
If a seller knows of a defect but does not disclose it, the seller is liable for the defect (see Question 11). If the assets being sold are the shares of a company holding real estate (and not the real estate itself), the Civil Code's implied warranty relates to the shares rather than to the real estate.
The owner is generally liable for matters relating to the real estate, even if the causal event occurred before the owner obtained title. The exception is environmental liabilities, which generally remain with the party that caused the contamination, unless this party cannot be identified. In this case, the current owner is liable.
Even after the sale of the real estate, an owner or occupier generally retains liability for environmental matters which it has caused (see Question 14).
Real estate tax
The seller collects VAT at 10% of the purchase price of the buildings from the buyer. Land is not subject to VAT. The collected VAT is paid by the seller to the tax authorities.
If a buyer runs a business and registers as a business entity with the tax office within 20 days from the conclusion of the sales contract, the VAT paid by the buyer to the seller is refundable to the buyer.
VAT is not charged on the purchase price if the buildings are transferred as part of a comprehensive business transfer.
The buyer must pay the following taxes in connection with the sale and purchase of real estate:
Registration Tax (including surtax) at 2.4% of the purchase price (or 7.2%, if the real estate is in the Seoul Metropolitan Area).
Acquisition Tax (including surtax) at 2.2% of the purchase price (or 6.6%, if the real estate is in the Seoul Metropolitan Area and the building is newly constructed for use as a headquarters).
In addition, the buyer must incur the cost of buying housing bonds (0.8% to 5% of the government-posted standard value of the real estate) although there are certain exceptions. Housing bonds are bonds that are issued by government to finance the development project for small and medium-sized residential properties.
The seller must also pay tax on any capital gains from the sale. Companies pay corporate income tax at 24.2% (including surtax). Individuals pay capital gains tax at rates varying from 6.6% to 77% (including surtax). The tax treaty in place with the relevant foreign jurisdiction regulates the tax paid by foreign entities (including withholding tax) and any exemptions from capital gains tax.
Stamp duty of between KRW20,000 and KRW350,000 is levied for each sale and purchase agreement of real estate.
The use of ABS, REIT, REF and PFV structures provide tax incentives to investors, provided certain requirements are satisfied including a reduction of:
Taxable income for corporate income tax purposes.
Holding business premises
Although there is no legislation requiring buildings to satisfy greenhouse gas emission standards or to achieve certain energy efficiency levels, tax benefits are available to buildings designated as "green buildings" by satisfying criteria set out in the Regulation on the Authorisation of Nature-Friendly Buildings.
No governmental approvals are generally required for foreign persons to acquire real estate. However, when a foreign person acquires land in South Korea, the acquisition must be reported under the Foreigners Land Act, when the land is acquired either:
Indirectly through a company, of which 50% or more of which is owned by the foreign person.
A foreign entity can enter into an agreement to buy or lease real estate in South Korea. A foreign entity can also provide a guarantee or provide collateral security to buy or lease real estate in South Korea. In both cases, the foreign entity must comply with routine reporting obligations under the Foreign Exchange Transactions Regulations. If a foreign entity acquires a Korean company that owns land, the acquisition of interests in land must be reported within six months (Foreigners Land Act).
Change of control of a company does not generally affect its holdings of real estate. However, certain reporting obligations apply to foreign companies under the Foreigners Land Act (see Question 22).
Central or local governments can only order the Central Land Taking Committee to expropriate private real property when there is a statutory public need. In this case, the the Central Land Taking Committee determines the purchase price, based on all the circumstances, including market value and the government-posted value.
Real estate finance
A mortgage over the real estate is most commonly used to provide security for a loan. A mortgage interest must be registered in the relevant title registry to be enforceable. Once registered, the mortgage holder has priority over subsequently registered security interests over the property. A lender may also require a pledge of the borrower's rights and claims to all revenues generated from the property.
A trust structure is also commonly used to raise finance. Under the trust structure, the borrower transfers ownership of the property to a trustee, who manages the property for the benefit of the lenders until repayment of loan. On repayment, title to the property reverts to the borrower. The trust must be registered in the relevant title registry to be enforceable.
See Question 27.
Real estate leases
The Civil Code provides default lease terms. However, parties can contractually depart from these, provided that Civil Code provisions intended to protect tenants are not overridden. In addition, the Commercial Building Lease Protection Act protects the interests of certain small scale commercial tenants. A landlord can only refuse to renew a lease at the tenant's request when either (Commercial Building Lease Protection Act):
The landlord has a justifiable reason.
The lease term has exceeded five years.
There is no legal restriction on rent levels, which are subject to negotiation between the parties. Parties generally agree a mechanism for periodic rent adjustment:
Based on a fixed rate.
Fixed by reference to a relevant index such as the consumer price index or the inflation rate.
However, a 9% cap on annual rent increases applies to certain small scale commercial leases (Commercial Building Lease Protection Act).
The landlord or tenant can request a rent adjustment if existing levels become inappropriate due to changes in the amount of public charges or other changes to its economic situation (Civil Code).
10% VAT is payable on rent.
There is no typical length of lease term. The lease term is subject to negotiation between the parties, although the (Civil Code):
Initial lease term cannot exceed 20 years.
Renewal term cannot exceed ten years.
If the tenant perfects its interest by registering his leasehold right in the relevant title registry, the tenant can have security of occupation during the entire lease term, including if there is change of ownership. In addition, a tenant in certain small-scale commercial leases regulated by the Commercial Building Lease Protection Act can have security of occupation by:
Completing a business registration.
Being in actual possession of the leased premises.
Unless expressly agreed in the lease, the tenant does not have a unilateral right to renew the lease at the end of the lease term. However, a landlord under certain small scale commercial leases cannot refuse lease renewal at the tenant's request (see Question 30).
The most common ground for termination is breach of the lease. A lease typically allows the landlord to terminate the lease if the amount of rent owing is two months' worth.
Unless the lease specifically provides for an early termination right by prior notice, neither party can unilaterally terminate the lease before its agreed term without cause.
The Ministry of Land, Transportation, and Maritime Affairs (see box, Real estate organisations) devises the basic plan (see Question 40) at a national level, and local governmental authorities are responsible at a local level. The relevant legislation includes:
National Land Planning and Use Act, which deals with administrative regulation on the zoning and use of land.
Building Code, which outlines procedures related to construction and building use.
Depending on the type of development, there are special laws regulating the:
Development of industrial and residential complexes.
Redevelopment of destroyed city areas.
Broadly, there are two types of real estate development plan:
The basic plan.
The implementation plan.
The basic plan is devised by national or local governments.
The implementation plan is devised by an entity wishing to pursue a specific real estate development project. The nature of the implementation plan differs depending on the type of development project (for example, residential, retail and commercial) and the relevant laws. The relevant governmental authority must approve the implementation plan under the relevant laws.
Which body grants initial planning consents?
Do third parties have the right to object? If yes, please give brief details.
In what circumstances is there a public inquiry?
How long does an initial decision take after receipt of the application?
Is there a right of appeal against a planning decision? If yes, please give brief details.
Local government authorities usually review plans and grant initial planning consents.
Third party rights
Interested parties can file objections to basic and implementation plans.
Public inquiries are generally held for basic and implementation plans.
For both types of plan, the statutory timeframe is generally one to two months. However, this timeframe is not legally binding and can be extended at the discretion of the relevant governmental authority.
Appeals can be made to the administrative court.
Real estate organisations
Ministry of Land, Transportation, and Maritime Affairs (MLTM)
Main activities. The MLTM is an administrative body of the central government, responsible for:
Balanced regional development.
Enhancing national competitiveness and construction.
Operation and management of major infrastructure.
The MLTM also oversees REITs.
Supreme Court of South Korea Internet Registry Office
Main activities. This office provides access to court registries of land and buildings.
Ministry of Strategy and Finance (MOSF)
Main activities. The MOSF is an administrative body of the central government responsible for medium to long term economic and social development policies, including:
Financial Supervisory Service (FSS)
Main activities. Its functions include, along with the MOSF, overseeing and regulating the REF and ABS structures.
Yon Kyun Oh
Kim & Chang
Qualified. Korea, 1982; New York, 1991
Areas of practice. Real estate; energy; M&A; foreign direct investment; overseas investment; structured finance; and corporate governance.
- Advising two Korean real estate funds established under the old Indirect Investment Asset Management Business Act in their sale of an office building in Gangnam, Seoul.
- Advising a GIC-owned REIT in acquiring Newcore Gangnam Outlet, Seoul.
- Advising a Korean subsidiary of a German investment company in acquiring a high-end office building in Yeoido, Seoul.
- Acting as lead counsel to National Pension Services in acquiring a prime office building in Sydney.
For more details of recent transactions, publications, and so on, see full PLC Which lawyer? profile here.
Kim & Chang
Qualified. Illinois, 1993; New York, 2000
Areas of practice. Real estate; foreign direct investment; and energy.
- Advising a Korean subsidiary of a European investment company in acquiring a high-end office building in Seoul.
- Advising a European based investment fund in its sale of an office building in Seoul.
- Acting as a counsel for a US-based fund in its acquisition of a loan.
- Advising a European based investment company in its sale of an office building in Seoul.
Kyung Hee Choi
Kim & Chang
Qualified. Korea, 1999
Areas of practice. M&A; real estate; environment; foreign direct investment; and energy.
- Advising a German based investment fund in its sale of a office building in Yeoido, Seoul.
- Advising a Korean bank in its sale of buildings in Seoul.