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REIT legislation to boost SA listed property sector

25 Jul 2013

The recent introduction in South Africa of real estate investment trust (REIT) legislation is expected to help grow the property market as international investors are likely to be more willing to invest on the basis that they have a better understanding of the sector.

According to the European Public Real Estate Association (EPRA), there are 35 countries worldwide that have REIT or 'REIT-like' legislation in place. The global market for REITs is over US$1.1 trillion with United States accounting for more than 50% of that. Other countries that have REITs include Australia, France, Canada, Japan, United Kingdom, Singapore, Hong Kong and Netherlands.

According to Naledi Mongoato, Investment Analyst at Novare Equity Partners, the private equity business in the Novare Group, in Africa only Nigeria, Kenya and South Africa have REITS or are considering introducing REITs.

South Africa’s listed property market has a capitalisation of over R300 billion, and should all eligible property entities be listed in terms of the SA REIT requirements, South Africa will place in the top 10 REIT jurisdictions in the world.
Said Mongoato: “In developing countries and emerging markets alike, the three main benefits of REITs are their flow-through taxation benefits, greater liquidity and capital flexibility, and high yields.

“Given growth in the development of shopping malls in Africa, REIT legislation offers property developers another exit avenue for their investments, rather than the traditional trade sale. Exiting by listing their property developments would enable developers to earn additional revenue from the management of the REITs.”

Until recently, property investors in South Africa could only invest in listed property through property unit trusts (PUTs) and property loan stocks (PLS). However, the introduction of the simpler REIT legislation is expected to align property investments with global norms and overcome the greatest criticisms of PUTs and PLSs - their inconsistent tax treatment and complex oversight layers which often add costs and erode investor returns.

“REITs are entities that invest in a diversified pool of professionally managed real estate assets which offer a steady rental stream and exposure to capital growth. Similar to PUTs and PLSs, REITs allow investors to buy into real estate without a large capital outlay. However, with a REIT investors get more bang for their buck because of the additional taxation benefits, which will provide higher yields,” said Mongoato.

The REIT tax regime applies to both JSE-listed PUTs and PLS companies. These entities can apply to the JSE to convert into REITs. PUTs are already regarded as REITs, while PLS shareholders will have to change their company’s constitution through a resolution at a general meeting.

There are no prescribed property sector investment requirements, meaning that REITs can invest across various sectors including retail, office, residential, industrial and healthcare properties.

REITS are governed by the JSE Securities Exchange and need to own at least R300 million in real estate, distribute of 75% of distributable income annually and keep debts below 60% of gross asset value. A further requirement is that 75% of revenue received must be direct rental income that may incorporate dividends received from other REIT investments holdings.