Financial Supervisory Service tightens oversight of high-risk overseas real estate funds

The Financial Supervisory Service (FSS) is tightening oversight of high-risk investment products, specifically overseas real estate funds, to enhance investor protection. This move follows instances where investors suffered total losses due to the structural risks of these funds.

In many overseas real estate funds and REITs, domestic investors hold junior equity positions while local financial institutions hold senior debt. Even if a property generates steady rental income, a drop in the property's appraised value can trigger an Event of Default (EoD) under loan agreements. This allows senior lenders to exercise collateral rights and force a sale, potentially causing junior investors to lose their entire principal.

To mitigate these risks, the FSS is implementing several measures:

1. Enhanced Due Diligence: Since April, asset managers must directly review local due diligence reports and include internal control evaluations signed by CEOs and compliance officers. They must also include stress test scenarios in securities reports.

2. Standardized Risk Disclosure: Starting September 30, ten types of high-risk funds—including overseas real estate, REITs, and DLFs—must clearly list four key risks on the first page of simplified prospectuses. This includes explicit warnings that property price declines can lead to total loss regardless of rental income.

3. Historical Loss Transparency: Managers must disclose past losses exceeding 20% for similar products, including the fund name, location, and loss scale.

3. Strengthened Review: The FSS has established a special review team within the Asset Management Supervision Department to conduct intensive inspections of high-risk products.