With the introduction of REITs (Real Estate Investment Trusts) to the South African property investment market as of April this year, says Michael Bauer, general manager of property management company IHFM, a huge advantage as an international property investment vehicle will be presented to those looking to invest in South Africa.
In the past those who wanted to invest in listed property in South Africa chose JSE listed property unit trusts (PUTs) or property loan stock companies (PLSs). Both of these are similar insofar that they solely invest in commercial property and that they provide investors with income from income producing properties, but their legal structures are different. The taxation on these differs and the amendment of the Taxation Bill will be addressing this issue.
The REIT system does not replace either of the above but with the amendment of the Taxation Bill, transparency in taxation is provided, says Bauer.
Under the REIT legislation CGT is no longer payable on disposal of assets and without CGT it is likely that activity in this sector will increase. A more transparent tax system, along with access to tax benefits, will make this a preferred investment vehicle and may unlock opportunities even in the residential property market.
To qualify as a REIT fund, bodies need to have:
· a minimum of R300 million in assets;
· a total debt to asset ratio of no more than 60%;
· 75% income from property rentals; and
· a distribution minimum of 75% of the distributable profits (dividends).
If these requirements are met then the fund can be listed on the stock exchange and the potential is huge, although a potentially negative factor is the high required payout in dividends, says Bauer. (Instead of reinvesting the profits, they will be paid out to investors. In order to grow the REIT, it will have to raise more capital and dilute shareholding, but on the other hand ensure a dividend yield.)
“If one had to buy up residential property to build a portfolio it is only slightly different from commercial property in that more volume is needed. The REIT system being implemented now opens up this avenue as an investment vehicle,” he said.
The main benefit of REITs is that you can have direct foreign investment, said Bauer. The REIT legislation is in line with international best practice and this structure is understood globally so, if SA listed property funds convert to this system, South Africa will be the 8th biggest REIT market and they place themselves in a better position to attract foreign investors.
As in Europe, in South Africa there are many people who will probably rent in perpetuity and never own their own home (either by choice or because their financial situation won’t allow this) so, with there being no shortage of tenants, it would make sense for residential REITs to be established, he said.
Michael Bauer is a regular contributor to www.sectionaltitlesa.co.za. For further information on IHPC’s services go to www.ihpc.co.za or telephone Michael Bauer on 083 255 4442. He can also be emailed on firstname.lastname@example.org.