SOUTH KOREA Law and Practice Contributed by: Junghwan Lee, Dong Seok Woo, Jun Woo Cho and Jee In Kim, Lee & Ko
as new supply declined significantly following several years of rapid development. Impact of Inflation and Interest Rates While inflation has moderated toward the 2% target as of early 2026, elevated interest rates continue to shape market dynamics. The Bank of Korea maintained its base rate at around 2.5%, and financing conditions remain relatively tight compared to prior years. Higher financing costs have led to greater asset-level differentiation and wider pricing gaps. Capital has concentrated in prime, income-generating assets, while development projects and weaker assets have faced more conservative underwriting. The higher-rate environment has also contributed to ongoing restruc - turing activity, with distressed asset transactions and non-performing loan (NPL) sales remaining active. Adaptation to Emerging Trends and Structural Changes Market participants have continued to adapt to evolv - ing structural and technological trends. First, the market for tokenised securities and fractional real estate investment has transitioned from regulatory sandbox experimentation toward a formal regulatory regime. Legislative amendments passed in January 2026 established a legal framework for the issuance and circulation of security tokens, with implementa - tion expected in 2027. Preliminary licences for over- the-counter trading platforms were also granted in February 2026. However, the market remains at an early stage of development, with infrastructure and secondary trading systems still being established, although tokenisation may improve accessibility and liquidity in real estate investment. Secondly, PropTech adoption has gradually increased, particularly in the operation of prime office assets. Smart building technologies are beginning to emerge, as illustrated by Factorial Seongsu in Seoul, which in 2026 became one of the first buildings in Korea to obtain a SmartScore certification. This reflects the adoption of AI- and IoT-based building management systems aimed at improving energy efficiency and operational performance. However, such technologies
remain concentrated in newly developed, high-quality assets. Thirdly, large-scale conversion of office assets into residential use has not yet become a mainstream trend in Korea. Although policy discussions have intensified around repurposing certain commercial or non-residential assets to address housing supply, practical implementation remains limited. More imme - diate adaptive reuse activity has been observed in the hospitality sector, where certain assets are being repo - sitioned in response to increased tourism demand. Finally, financing structures have evolved in response to tighter liquidity conditions. Alternative lenders, including securities firms and private credit provid - ers, have become more active, while traditional bank lending has become more selective. At the same time, restructuring and workout activity in the project finance sector has remained a key feature of the mar - ket. 1.3 Proposals for Reform Several regulatory and policy developments are expected to have a meaningful impact on real estate investment and development in Korea. First, a legal framework for tokenised securities was established through legislative amendments passed in 2026, with implementation expected in 2027. This is expected to enable the issuance and trading of real estate-backed interests in tokenised form, although the extent of market adoption remains uncertain. Secondly, regulatory reforms in the real estate project finance (PF) sector are being actively implemented in response to recent market stress. Authorities have introduced a framework under which PF projects are classified (eg, normal, at-risk and distressed), with dif - ferentiated measures applied, including restructuring or asset disposals for distressed projects and liquidity support for viable projects. Financial institutions with significant PF exposure, such as securities firms and savings banks, are subject to enhanced supervisory scrutiny, including tighter risk management require - ments, increased provisioning and more conserva - tive underwriting standards. There is also a policy emphasis on strengthening equity capital in devel -
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