▲ Financial Supervisory Service
Investors are being urged to exercise caution as real estate funds, which are commonly perceived as safe, can result in the complete loss of principal.
The Financial Supervisory Service (FSS) released major dispute cases and precautions for investors regarding overseas real estate public offering funds today (August 10).
An investor, identified as Mr. A, lost his entire principal after investing upon being told by a securities firm employee that "the investment is in real estate, so it is safe without any worries of principal loss."
However, as the securities firm employee's definitive expressions were confirmed, Mr. A was able to have the securities firm's liability for damages partially recognized for violating the prohibition on unfair solicitation.
Overseas real estate funds are typically operated under a leverage structure that purchases real estate with loans from local financial institutions. If repayment is not made by the maturity of the senior loan, the lender can forcibly sell the property by exercising its security rights.
Principal losses for investors occur during this process.
In addition, according to local loan agreements, a "cash trap" can be triggered where rental income is preferentially attributed to the lender rather than the investors.
If the loan-to-value (LTV) ratio is exceeded or the vacancy rate rises, the distribution of dividends to investors can also be suspended.
The risks associated with restrictions on early redemption are also significant.
Most real estate funds are established as closed-end funds, restricting the recovery of investment funds before maturity.
The FSS pointed out that even if investors sign up without properly hearing explanations about early redemption restrictions, it is difficult for this to be recognized as incomplete sales.
This is because restrictions on early redemption are an inherent characteristic of the real estate fund structure and are often stated in the prospectus.
Furthermore, the recovery of investment funds may not take place on time even after the fund matures.
The FSS explained, "The recovery timing may be delayed depending on the real estate sale or liquidation procedures," adding, "Even if you oppose the extension of maturity at the general meeting of beneficiaries, the recovery of investment funds can be delayed if the fund lacks cash-equivalent assets."
Moreover, overseas real estate public offering funds set the fund's maturity to match the tenant's lease term, but if market conditions worsen, the maturity may be extended.
In this case, risks such as tenant eviction and vacancies increase, leading to a decrease in rental income and principal loss due to declining asset values.
The FSS advised that once a handwritten signature is provided, it is difficult to be recognized for liability for compensation later on the grounds of a breach of the duty to explain, urging, "If the sales representative's explanation is insufficient, you must request additional explanations before providing a handwritten signature."
It also emphasized, "Even if recommended by a sales representative, you should decide to invest only after reviewing your own investment period and the level of loss you can endure."
(Photo: Yonhap News)
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