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The First Shariah Compliant Section 12J Fund in SA

20 November 2018 Prudential Shariah (Pty) Ltd

According to the Morningstar Fund Rating Agency’s statistics, the top three Shariah Compliant Unit Trust Funds in South Africa - with a combined market capitalization of more than R10bn- have performed relatively poorly over the last five years with average annualised returns of 3.9%, 4.7% and 7% respectively. Moreover, investing directly into these Unit Trusts does not offer investors any income tax breaks.

About to change this, is the newly established Prudential Shariah 12J Investment Fund, a joint venture between fund managers Prudential Shariah and venture capital asset management firm, Futureneers.  This is the first Shariah compliant Section 12J Venture Capital Company in South Africa. (The fund’s Shariah certification was issued by the firm Global Islamic Financial Services). 

“I am excited to have been involved in developing and launching such an innovative investment product into the South African Muslim investor community” says Mufti Ismail Desai who also serves on the fund’s board and investment committee where he will oversee the investment activities. “The fundamentals in the fund’s design are solid; it is managed by an experienced team with an exceptional track record, and the investment mandate is well defined. I am confident that investors will find the value proposition an attractive consideration and alternative.” 

Treasury enacted Section 12J of the Income Tax Act, incentivises South African taxpayers to invest into the local economy, by means of a 100% tax deduction on funds invested into a registered Section 12J Venture Capital Company. This equates to an immediate return of up to 45% on the full investment amount, assuming the investor is on a 45% income tax bracket. 

If an investor (an individual in the highest tax bracket) therefore invests R1 million into a Section 12J Venture Capital Company, the investor will receive a tax deduction of up to R450,000 at the end of the tax year. What this means is that the investor will receive a return of 100% on his/her investment, but only have exposure on 55% of the original investment amount. 

Description

Individuals

Trusts

Companies

Initial Investment

R 1,000,000

R1,000,000

R1,000,000

Effective Tax Rate

45%*

45%*

28%

Tax Relief (in the financial year of the initial Investment)

(R450,000)

(R450,000)

(R280,000)

Net cost of Investment

R550,000

R550,000

R720,000

*Assuming the individual or trust is taxed at a 45% income tax rate 

The primary investment focus of the Shariah 12J Investment Fund will be to invest in student, business and leisure hospitality properties.  A secondary focus will be to invest in businesses that secure moveable assets and offer them to their B2B clientele on a rental basis. The fund considers various types of moveable assets for investment, including but not limited to office automation, telecommunications, information technology, security and medical equipment as well as yellow metal such as graders and excavators to name but a few. Investments are considered together with the equipment suppliers or on a stand-alone basis, and in combination with the Section 12J Tax benefit for investors. 

Why these areas? 

According to the Department of Higher Education and Training, there is currently a shortfall of approximately 220,000 student beds in South Africa. Based on predicted future enrolment numbers, the current shortfall is expected to widen even more over the next few years as it is projected that by 2030 an extra 400,000 beds (excluding the current shortage), would be needed to meet the enrolment targets set out in the Post-School Education and Training policy and the National Development Plan. 

This together with the government’s drive to alleviate the student accommodation shortfall by allowing these student hospitality properties to qualify as Section 12J investments, creates an attractive opportunity in the market for investors. Investing in quality student accommodation properties, combined with the Section 12J tax benefit for investors, makes student hospitality accommodation the 1st and most important investment focus for the fund. 

Despite a challenging political landscape, South Africa has shown a steady growth in tourism numbers over the past 10 years, with a strong projected growth for the foreseeable future. The number of international tourists is estimated to have increased by 18% from 2013 till 2018. The forecasted growth for the next 4 years is estimated to be over 16%. In addition, business travel also offers and important income stream for appropriately positioned hospitality properties. 

Quality business and leisure hospitality properties are therefore in high demand. This together with government’s drive to stimulate investment into the tourism industry, by allowing hospitality properties to qualify as Section 12J investments, and the relaxation of tourist visa regulations, creates an attractive investment opportunity. Investing in hospitality properties that deliver above average capital growth and good yields, combined with the Section 12J Tax benefit for investors, makes business and leisure hospitality property the 2nd investment focus for the fund. 

The movable asset rental market in South Africa is estimated to be worth between R6bn and R7bn p.a. Many corporates and SME’s use rental finance as a means to procure the use of depreciating assets in their business rather than buying assets, while suppliers are looking for tailor-made financial solutions to offer their products to their clients. 

Investors who decide to invest into the Prudential Shariah Section 12J Investment Fund will enjoy the following expected returns and benefits: - 

  • Tax benefit of up to 45% on investment;
  • Targeted dividend yield of CPI +2% on net risk capital;
  • Targeted IRR of 16% p.a. on net risk capital;
  • Shariah approved and compliant fund structure;
  • Investments that are screened by a Sharia Supervisory Board;
  • Investment diversification into an alternative asset class;
  • Above market related income and capital returns,
  • Investing alongside other investors sharing investment risk;
  • A transparent fund with all-inclusive fees and no hidden costs;
  • Investment exposure into the R6bn movable asset rental market in SA.
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