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SA REITs are finally a reality – what will this mean for investors?

18 April 2013 Fiona Zerbst

For those who watch listed property closely, it will be good news that the JSE's new listing requirements will allow the South African Real Estate Investment Trust structure, or SA REIT, to become a reality on 1 May 2013. It's taken six years for the S

Estienne De Klerk, Property Loan Stock Association (PLSA) REIT committee chairman and executor director of Growthpoint Properties, says that it has taken some time to iron out rules and regulations despite the fact that most of the rules were agreed to within the first year of planning.

“Treasury had some issues with double taxation treaties, particularly in the wake of the global financial crisis, but it was decided not to interfere with the sector from a tax point of view until all regulation had been sorted out,” says De Klerk. “The aim has been to get rules in place and get the sector sorted so there’s no industry uncertainty.” It has been agreed that the JSE will regulate the sector.

What is a REIT?

A REIT is essentially a company that owns and operates income-producing property (encompassing immovable property, interest in leases relating to this, as well as interest in a property subsidiary or holdings in another REIT). REITS must invest solely in immovable property assets and collateral debt instruments and hedges that reduce the risk of property-related loans. REIT shares are publicly traded by REITs must distribute at least 75% of its taxable earnings to investors in the form of dividends every year.

At the moment, property investment vehicles are currently structured as property unit trust (PUT), property loan stock (PLS) or variable loan stock (VLS) structures. International investors are not familiar with these structures, so these will be phased out in favour of the globally recognised REIT. If these companies adopt the JSE’s regulatory framework they will qualify to list on the REIT board. There is no entry tax to become a REIT, and distributions on shares and debentures are deductible expenses – none-too-shabby incentives for companies to take the leap.

An SA REIT has to own at least R300m of property to list and it must keep its debt below 60% of its gross asset value. It must earn 75% of its income from rental or from property owned, or investment income from indirect property ownership. It has to monitor risk very closely and is not allowed to use derivative instruments that aren’t part of the ordinary course of its business.

If listed property funds convert to the REIT system, as expected, South Africa will become the eighth largest REIT market in the world.

What REITs set out to achieve

“We’re one step closer to achieving for listed property what we set out to achieve,” says De Klerk.

At the moment, about 75% of South Africa’s listed property companies are not technically speaking REITs, though they may have the appearance of it. These companies have synthetically created rental flow through the Property Loan Stock structure, but shares have been linked to debentures.

“These companies have looked like ducks and quacked like ducks but they haven’t been ducks,” says De Klerk. “Index funds need certainty – they won’t take any notice of us without it, so we are setting out to establish accountability by creating flow-through in a legislative sense.” The REIT regime will protect the flow-through of net rental in the form of distribution per share.

For investors, the effect of the REIT structure will be minimal. Importantly, though, tax rules have been set out very clearly so there will be no ambiguity and therefore no tax risk. The investor will be responsible for tax on distributions received, which is a shift from the vehicle itself paying income tax.

Local investors will receive gross distribution in the form of a taxable dividend free of dividend withholding taxes. Tax on distribution will be applied at each shareholder’s tax rate. Overseas investors will be liable for dividend withholding tax at 15% after 1 January 2014, or the relevant rate set in the applicable double tax agreement – this may prove a disincentive, but we’ll have to see how investors react.

Sector outperformance

Listed property has proved to be one of the best-performing asset classes over the past few years, outperforming other sectors with embarrassing ease. “Over the past 14 years, we’ve outperformed other asset classes eight times,” says De Klerk. “We average return a year, over 10 years, has been 22%, which gives you an idea of how impressive the sector has been. With the REIT, we’re bringing South Africa in line with best practice, and because REITs are exempt from capital gains tax (CGT) – which is an international norm, by the way – we believe they’ll prove attractive to investors.”

Local investors could be drawn to investing in listed property because of the tax advantages, says Patrycja Kula, business development manager at the Johannesburg Stock Exchange (JSE). She points out that they can fund their REIT investment on a pre-tax basis if they use debt effectively.

What of the future? De Klerk says we’ve obviously come off a low base and we’ve seen yield compression, which is in line with what’s happening globally, since bond yields have gone right down. “It’s been a bit of an artificial environment,” he admits, “but we still compare very favourably to developed markets, which you can see by comparing vacancy levels.”

De Klerk believes it’s probably unrealistic to expect last year’s returns, but they should still be decent enough. “There’s an equity component to the sector and people do forget – or underestimate the power – of this,” says De Klerk.

He believes the next step is to grow and provide a platform for the unlisted property sector; but that is very much in the future.

Worth noting

If REITs from part of an RA, pension, provident and preservation fund, investors don’t pay tax on dividends.

Existing investors may be worried that the new SA REIT will change their investments, but this isn’t the case, says De Klerk.

For property loan stock company shareholders, distributions will change from ‘interest’ to ‘rental income’. Investors in PUTs won’t feel any impact because from 1 May they’re automatically considered a ‘Trust Reit’ and will be listed on the JSE REIT board as a matter of course.

Editor’s thoughts:
Treasury has recognised that listed property is, in effect, a savings vehicle and a very suitable investment when it comes to pensions – listed real estate and property form part of the 25% prudential investment according to Regulation 28. The sector is capital-intensive but quite cash-generative. Having all listed property investment vehicles aligned, in a tax sense, will obviously make for greater certainty which will appeal to investors. How do you feel about the new REITs regime? Do you see any downsides? Comment below or email

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