After a six-year journey, one of the most flexible REIT (Real Estate Investment Trust) regimes internationally has become a reality in South Africa, which could have its first SA REIT from April 2013.
In a significant development for South Africa’s publicly traded real estate sector, formal REIT tax legislation was announced and published in the Taxation Laws Amendment Bill of 25 October 2012.
Parts of the bill come into effect immediately while others will apply only after REIT conversion. From 1 April 2013, any qualifying company with a tax year starting on 1 April or after can adopt the new SA REIT structure at the start of its tax year.
Estienne de Klerk, Property Loan Stock Association (PLSA) REIT committee chairman, says: “The combined forces of an innovative property sector and receptive and efficient National Treasury have created a flexible and functional framework for the SA REIT. Together we have shaped a solid base for South Africa’s listed property to grow with tax certainty.”
The new SA REIT encompasses both existing REIT-like local structures, property loan stocks (PLS) and property unit trusts (PUT). It brings both local structures’ tax treatment in line with each other and in line with leading international structures. While allowing the distinct structures of PLSs and PUTs, it treats both equally under the REIT tax dispensation.
This means that all property companies currently listed on the JSE could qualify as for the REIT structure and tax dispensation, which isn’t prescriptive of management models and allows companies to have different equity structures, such as different shares with different rights.
Should they all elect to adopt SA REIT requirements, South Africa would likely become the eight largest REIT market globally.
“South Africa’s weighting within global REIT indices could potentially quadruple,” explains Leon Allison of Macquarie First South Securities Research. He points out that SA’s largest REIT-like company, Growthpoint Properties, could become the largest emerging market REIT and the 40th largest REIT in the world.
De Klerk notes there are still a few essentials to wrap up to prepare for REITs in South Africa. “We’re working closely with the JSE to complete the Listings Requirements for REITs. We’re also compiling best practice accounting disclosure and reporting standards. This will not only improve disclosure in the sector, but make it easier for accurate comparison of different SA REIT companies.”
The PLSA, which spearheaded the initiative to introduce a best-of-breed REIT in SA, will merge with the Association of Property Unit Trusts (APUT) to create a single representative body for the sector. Founding documents for the new association – SAREIT – should be finalised in early 2013.
“Meanwhile, we are compiling education initiatives to make sure property companies, potential investors and investors have a good understanding of the new structure and the benefits it offers them,” says de Klerk.
He explains the discussions started by the PLSA with National Treasury for South Africa’s listed property sector, will be continued by the South African Property Owners Association (SAPOA) REIT Committee for unlisted, institutional and other property loan stock companies. “While 2013 will be business as usual for these companies and National Treasury, it is a priority for both to settle a framework that takes REITs further, to the unlisted market.”
To list as a REIT companies need to meet four basic measures:
- A minimum gross holding of property assets of R300 million
- A total debt to total asset ratio of 60%
- 75% minimum income from property rental, as broadly defined
- Distribution of a minimum of 75% of distributable profits
REIT conversion process summary for a PLS:
- Adopt a standard memorandum of incorporation including the four criteria, once getting approval from investors.
- Apply to the JSE to become a REIT and ensure compliance to the JSE’s listing requirements.
- Company directors will be responsible for ongoing compliance with the JSE.
REIT conversion process summary for a PUT:
- All PUTs will be deemed REITs from 1 April
- Meet all the JSE listing requirements.
- Trustees will continue to report to the FSB and meet all FSB regulations.
Benefits for PLSs:
- No conversion fee or entry tax.
- Exemption from all existing capital gains tax liabilities and capital gains tax on disposals of investment properties in future.
- An end to the complicated loan stock structure – units indivisibly traded on the JSE comprising debentures stapled to shares. REIT distributions made to shareholders of converted PLSs will be allowed to be tax deductable dividends, taxed in investors’ own hands as rental at their own applicable rates. From 1 January 2014, foreign investors will become liable for Dividends Withholding at 15% or the applicable rate of the double taxation agreement with their country.
Benefits for REITs and PUTs:
- Reorganisation roll-over relief for merger and entity acquisition transactions.
- Exemption for capital gains tax in controlled subsidiaries