South Korea Warns Investors Could Lose All in Overseas Real Estate Funds

South Korea’s financial watchdog warned that investors in publicly offered overseas real estate funds could lose their entire principal or face suspended dividend payments after buying products marketed as safe.

The Financial Supervisory Service said on August 10 that it has continued to receive complaints and dispute filings related to cases of total principal losses in real estate funds.

The regulator said investors can lose all of their principal even if property prices decline only slightly. Fund managers typically purchase properties with loans from local financial institutions. If those loans are not repaid on time, lenders can exercise their collateral rights and force a sale of the property. That would reduce the amount returned to investors.

The FSS also said dividend payments can be halted. A “cash trap” can be triggered if the loan-to-value ratio, or LTV, and vacancy rates exceed certain thresholds. When that happens, rental income is directed first to the financial institutions that lent money to the fund. The FSS said some securities firms had marketed publicly offered overseas real estate funds to consumers as products that pay fixed interest.

Sim Woo-il, Hankyung.com reporter goodwill@hankyung.com