REITs Gain Appeal with 8% Yields and Separate Taxation
Dividend Income Tax Breaks Take Center Stage in the Equity Market
Separate taxation of dividend income has emerged as a major topic in Korea’s equity market. In an effort to revitalize stock market participation, the government has announced a tax reform proposal that applies preferential, stepwise tax rates of 20% and 35% to dividends received from companies that meet certain “high-dividend” criteria. Currently, financial income exceeding KRW 20 million is aggregated with other income—such as wages and business income—and taxed at progressive rates of up to 45%. As a result, high-dividend stocks have surfaced as a key option for tax-efficient investing.
Still, it remains unclear how many investors will actually pursue these tax benefits and whether they will translate into a meaningful boost for the broader stock market. To qualify as a high-dividend company, a firm must maintain a payout ratio above 40%, or meet the more stringent requirement of a payout ratio of at least 25% combined with dividend growth of more than 5% compared with the average of the previous three years. In reality, relatively few listed companies satisfy these conditions.
For investors struggling to find attractive opportunities among qualifying companies, listed REITs are worth considering. Although not explicitly covered in the latest tax reform, dividends from listed REITs are already subject to separate taxation. If investors meet the requirements—holding up to KRW 50 million in investment value for at least three years—REIT dividend income is taxed at a preferential rate of 9.9% for up to three years.
The benefit currently applies only to investments made by the end of next year. However, given the usefulness of REITs as a policy tool, the sunset clause scheduled for the end of 2026 is likely to be revisited. REITs can serve as an important funding channel for rental housing development, particularly in response to the rapid rise in single-person households. They are also attractive as high-dividend investment products that can help support retirement income—one reason successive governments have consistently expressed support for expanding the REIT market.
As of this month, Korea has 23 listed REITs and two listed infrastructure funds. There are six ETFs that invest in domestic REITs and infrastructure assets, but only three equity-type ETFs qualify for the 9.9% separate taxation benefit: TIGER REITs Real Estate Infrastructure TOP10 Active, KODEX Korea Real Estate REITs Infrastructure, and PLUS K-REITs. Investors should note that applying for the tax benefit requires a separate request to their brokerage firm after purchase, either by phone or in person.
The average dividend yield of listed REITs currently stands at 8.3%. By comparison, the dividend yield of the KOSPI is 2.3%, while the KOSPI High Dividend 50 Index and the dividend-heavy KOSPI Financials Index both offer yields of around 3.9%. In other words, REIT investors can earn more than double the dividend yield of typical high-dividend companies while also enjoying the 9.9% separate tax rate.
One of the most important factors to consider when investing in REITs or REIT ETFs is the direction of interest rates. REITs often rely on debt issuance or borrowing to finance new asset acquisitions. Interest expenses are therefore closely tied to interest rates and have a significant impact on net income. In the U.S., long-term yields remain above 4.0% due to concerns such as the impact of tariffs. In contrast, South Korea’s 10-year government bond yield has fallen sharply—from 4.6% in October 2022 to around 2.85% recently—reflecting concerns about economic slowdown.
Another concern for the market is rights offerings. When REITs conduct equity issuance to fund new acquisitions or repay debt, share dilution and capital-raising uncertainty often weigh on short-term stock performance. However, given that REITs are required to distribute more than 90% of their earnings as dividends, such capital increases should be understood as an unavoidable step toward asset growth and balance sheet improvement.
The key issue is the future value of the newly acquired assets. Launched last month, TIGER REITs Real Estate Infrastructure TOP10 Active represents an evolution in REIT products, as an actively managed ETF designed to reflect portfolio managers’ judgment in events such as rights offerings.
Over the past three years, the KRX Real Estate REITs Infrastructure Index has posted a return of -21.51%, underperforming the KOSPI’s 29.57% gain by 51.08 percentage points. This reflects the combined impact of economic slowdown and high interest rates. Yet asset prices often discount negative expectations in advance, suggesting that much of the bad news may already be priced in.
It is well established that reinvesting high dividend income can contribute meaningfully to long-term performance. At a time of heightened uncertainty, incorporating domestic REITs or REIT ETFs into long-term investment portfolios—such as retirement plans—may be a prudent way to enhance stability while maintaining income generation.