South Korea Warns Overseas Real-Estate Funds Can Wipe Out Investors’ Principal

South Korea’s financial regulator warned that investors in publicly offered overseas real-estate funds could lose their entire principal or face delays in dividend payments despite being sold the products as safe investments.

The Financial Supervisory Service said on August 10 that it has steadily received complaints and dispute cases tied to total principal losses in real-estate funds.

Even a small decline in property prices can wipe out the full principal, the regulator said. Fund managers typically acquire properties using loans from local financial institutions. If they fail to repay those loans on time, lenders can exercise collateral rights and force a sale of the property, leaving less money for investors to recover.

The FSS also said dividend payments may be suspended. A so-called cash trap can be triggered if the loan-to-value ratio and vacancy rate exceed certain thresholds, causing rental income to be directed first to the financial institution that lent money to the fund. The regulator said it found that some securities firms had marketed publicly offered overseas real-estate funds to financial consumers as products that pay fixed interest.

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