With REITs lowering their debt levels, strengthening their balance sheets, and reporting higher earnings, it is likely that payout ratios could increase from current levels, says the SA REIT Association.
The average payout by SA REITs has declined from 93.5% in FY2019 to 75.6% in FY2023. However, payout ratios have been predicted to increase to about 78.4% in FY2024, according to Nedbank CIB research commissioned by the SA REIT Association.
“We forecast an increase in payout ratios over the medium term as current retained earnings are used to reduce debt and strengthen balance sheets with company earnings benefitting from potentially lower interest rates,” says Ridwaan Loonat, Senior Equity Research Analyst at Nedbank CIB.
Joanne Solomon, CEO of SA REIT Association, comments: “We welcome the research findings which affirm that SA REITs are aligned to global peers. As an organisation, we highly value feedback from our members, investors, and fund managers. This input helps us enhance our performance and position the sector as an attractive investment opportunity both locally and internationally.”
A payout ratio is the amount of earnings the company pays to shareholders in the form of a dividend. For REITs, a payout ratio is expressed as a percentage of distributable earnings. A large contribution to the total return of listed property companies is its income, which is dividends, notes Loonat.
The JSE requires listed REITs to distribute at least 75% of taxable earnings to shareholders annually, subject to the solvency and liquidity requirements as per the Companies Act.
For SA REITs, earnings that are retained will be subject to taxation, commonly known as tax leakage. If a company can minimise its tax leakage through assessed losses, it can retain more income. If a property company is not a REIT, then that company is not obliged to declare a dividend, and it would be up to the Board to decide when it would declare a dividend, if at all.
According to the research findings, the global average payout ratio is currently 76%, slightly lower than its five-year average of 79%. Distributions in the Asia-Pacific (APAC) region was less affected by the COVID-19 pandemic compared to South Africa and the US, which saw payout ratios decline 18% and 15%, respectively. European payout ratios remain below peers.
“It is encouraging that the SA payout ratio aligns with global peers. While it is important to consider regional differences in REIT distribution rules and tax systems, this alignment showcases the strength and competitiveness of the SA market,” comments Estienne de Klerk, Chairperson of the SA REIT Association and Growthpoint Properties South African CEO.
Additionally, the source of income like ordinary income, capital gains, and return of capital must be considered when determining payout ratios, according to the research.
The research shows that in the US and UK, REIT distribution regulation requires that at least 90% of taxable profits are paid as dividends, while in Belgium, the rule is at least 80% of net profits.
In Germany, the distribution rule is 90% of net income, while in France, three rules apply – 95% of tax-exempt profits from qualifying leasing activities, 70% of the capital gains and 100% of dividends received from subsidiaries that have elected for the Société d’Investissement Immobilier Cotée (SIIC) regime. A SIIC status is a special arrangement provided by a French law passed in 2002 giving tax benefits to publicly listed companies.
SA REIT Association is working on several valuable research pieces that will be released in the future.
