South Korea’s listed REIT industry has formally raised concerns with financial authorities, arguing that short selling conducted without regard for the characteristics of dividend-type assets is distorting market prices. The industry’s assessment is that excessive short-selling concentration in a low-volume market is causing more harm through supply-demand disruption than benefit through price discovery.
On July 22, the Korea REITs Association announced it had submitted a proposal to the Financial Services Commission (FSC) and the Korea Exchange requesting that listed REITs be excluded from short-selling eligible securities, or at minimum, be subject to differentiated regulations reflecting market conditions. The association emphasized that unlike typical growth stocks, REITs are structured to mandatorily distribute over 90% of distributable income based on rental revenue, making it a market primarily attracting retail and pension fund capital seeking stable dividends.
South Korea’s listed REIT market currently comprises 23 issues with a total market capitalization of approximately 8.3 trillion won (approximately $5.6 billion), with average daily trading volume per issue of just around 159,000 shares. This is roughly one-tenth of the KOSPI average. Despite limited liquidity, short-selling concentration is high. According to data presented by the association, as of May, 9 of the top 50 stocks by short-selling ratio were REITs, and in April, 7 out of 14 stocks designated as overheated short-selling targets — half the total — were REITs. In some cases, short selling accounted for over 50% of total trading volume on specific days for certain issues, and one REIT saw its monthly average short-selling ratio reach 24.5% of trading volume in June.
The association contends that when short selling concentrates in such a low-liquidity market, the intrinsic value of REITs — which should be based on net asset value (NAV) and dividend yield — faces significant risk of severe distortion from short-term supply-demand dynamics. Given that retirement pensions and retirees’ nest eggs account for a high proportion of investment in this market, the association argues that applying the same yardstick used for regular stocks is unreasonable.
If a blanket short-selling exemption proves practically unfeasible, the association proposed a phased alternative: applying differentiated short-selling restrictions first to small-cap REITs whose market capitalization or free-float ratio falls below certain thresholds. It also requested parallel measures such as strengthening the criteria for designating overheated short-selling stocks or setting a ceiling on short-selling ratios. An association official added, “Under the Capital Markets Act and the KOSPI Market business regulations, the FSC can adjust the scope of securities eligible for short selling upon request from the exchange, meaning institutional improvements are possible without separate legislative amendments.”
A real estate investment banking industry source noted, “REITs are products where dividends and underlying asset value, rather than corporate earnings, are the core factors. There is a need to re-examine whether applying the same short-selling framework used for regular stocks is appropriate.” The source added, “Given that the market is still small in scale, there are considerable voices pointing out that it is unreasonable to apply the same standards used in large overseas REIT markets.”
Another IB industry source, however, urged a cautious approach. “Considering the inherent price discovery function of short selling, differentiated regulation centered on low-liquidity issues is more likely to be a realistic alternative than a blanket exclusion,” the source said, while noting, “Some market participants have raised concerns that excluding REITs from short selling could actually further dampen liquidity, so attention is focused on what conclusion the financial authorities will reach.”
In major developed REIT markets such as the United States, Japan, and Singapore, short selling occurs naturally on the back of sufficient trading volume and securities lending infrastructure. The association reiterated its position that, unlike these markets, South Korea’s market is constrained in scale and liquidity, necessitating a separate institutional design that reflects market maturity.
Separately, the financial investment industry learned on the same day that the FSC is reviewing plans to accelerate the implementation timeline for supplementary measures on single-stock leveraged exchange-traded funds (ETFs), following President Lee Jae-myung’s order for “swift supplementation.” At a cabinet meeting the previous day, President Lee stated, “Supplementary measures must be prepared swiftly and thoroughly,” adding, “It seems to be taking too long.” In response, the FSC is coordinating IT work schedules with securities firms and asset managers through the Korea Financial Investment Association and is reviewing plans to bring forward the timeline for measures such as increasing ETF trading units. A financial authority official said, “Many of the implementation timelines announced at the time were set as provisional plans,” adding, “Regarding early implementation, we will proceed with industry consultations.”
President Lee’s remarks, intersecting with the short-selling issues raised by the REIT industry, are heightening market attention on the pace of institutional reform by financial authorities. The REIT industry’s proposal is being viewed not merely as a pro-industry request, but as a fundamental challenge calling for customized regulatory design that reflects the structural characteristics of South Korea’s capital market.