The Financial Supervisory Service (FSS) emphasized on the 10th that investing in real estate funds carries various risks, including the possibility of total principal loss and restrictions on early redemption, making them unsuitable for investors seeking short-term asset management or principal protection.

The FSS pointed out that many investors mistakenly consider these funds safe simply because they are backed by real estate. In practice, related disputes and complaints continue to arise, including cases of total principal loss. Before investing, and especially when fund maturities are extended, investors must verify that vacancy risks may increase due to tenant departures and other factors.

■ Risks of Maturity Extension, Vacancy, and Declining Rental Income Real estate funds are typically designed so that their maturity falls within the tenants' remaining lease periods, but maturity can be extended depending on market conditions. During this process, if tenants leave or vacancies increase, rental income declines and asset values may fall, potentially leading to principal loss. Investors should therefore carefully examine the likelihood of lease renewal for key tenants.

There are also cases where dividend payments are suspended. Depending on local loan agreements, a "Cash Trap" provision may apply, under which rental income is first allocated to lenders rather than investors. This is triggered when the loan amount exceeds the collateral value or when the vacancy rate rises. In such cases, dividends may not be paid, so investors should review the fund structure in advance.

■ Leverage Structure and Forced Sale Risks Overseas real estate funds often operate with a leverage structure utilizing loans from local financial institutions. If the loan is not repaid by the maturity of the senior loan, the lending institution can exercise its security interest and force the sale of the property. Since the loan is repaid first and only the remaining proceeds go to investors, a decline in real estate prices could result in investors losing their entire principal. The FSS advised investors to check the LTV (loan-to-value ratio) and interest cost structure before subscribing to a fund.

■ Early Redemption Restrictions and Delays in Investment Recovery Real estate funds are frequently structured as closed-end funds, where recovery of invested capital before maturity is restricted. Some funds are listed on securities markets, but a lack of liquidity can make trading difficult or result in sales at prices below the fund's actual value.

In fact, the FSS has received complaints from investors who claimed mis-selling, alleging they were not informed about early redemption restrictions when subscribing to overseas real estate public funds. However, in some cases, these claims were not accepted because the relevant details were clearly stated in the investment prospectus. Even at fund maturity, the recovery of invested capital may be delayed depending on the property sale and liquidation process. Even if investors oppose a maturity extension at a beneficiaries' meeting and request the return of their investment, recovery may be delayed if there are insufficient funds for payment. The FSS explained that unlike bank deposits and savings accounts, real estate funds do not guarantee the recovery of invested capital at maturity.

■ Caution with Handwritten Signatures and Responding to Unfair Solicitation Extra caution is also needed with handwritten signatures. Investors are often required to personally write phrases such as "I have heard and understood the explanation" on subscription application forms. As a result, in the event of a dispute, it may be difficult to have compensation liability recognized on the grounds of a breach of the duty to explain.

However, the FSS added that there have also been cases where partial liability for damages was recognized. In one instance involving a securities firm employee who solicited investments using definitive statements such as "since it is invested in real estate, there is no risk of principal loss," a violation of the prohibition on unfair solicitation was confirmed through call recordings.

Finally, the FSS urged investors not to blindly trust the recommendations of sales staff, but to independently assess their own circumstances, including their investment horizon and the level of loss they can tolerate, before making a careful decision on whether to subscribe.