Real estate investment trust legislation to be introduced in April

After more than six years of preparation, South Africa is entering a “new era” as the National Treasury introduces the new Real Estate Investment Trusts (Reit) regime on April 1.

All property companies currently listed on the JSE with a tax year starting in April, or after, could adopt the new South African Reit structure and apply for a listing on the Reit board of the JSE, Growthpoint Properties executive director Estienne de Klerk said.

No entry fee would be charged for companies applying for a listing; however, companies would be required to hold assets of R300-million, pay 75% of distributable income a year, maintain a loan-to-value ratio of below 60% and generate 75% of its revenue from rentals.

Those meeting the JSE Reit listing requirements, which would be finalised by month-end, would qualify for the Reit structure and tax dispensation.

Speaking at an educational seminar hosted by the Investment Analysts Society of Southern Africa, he said the introduction of the new legislation paved the way for South Africa to become the world’s eighth-largest Reit market globally.

The US was currently the largest Reit market, holding 61% of the market, followed by Australia, France, Canada, Japan, the UK and Singapore.

Meanwhile, Growthpoint would become the fortieth-largest Reit company in the world, De Klerk said.

The new JSE-regulated Reit legislation would align the tax treatment of existing Reit-like local structures, namely property loan stocks (PLS), which would fall under Company Reit on the JSE Reit board, and property unit trusts (PUT), which would fall under Trust Reit, with each other and other international structures.

Currently, there were 35 JSE-listed property firms, comprising six PUTs and 29 PLS’s. However, De Klerk commented that 75% of the listed companies in the country “were not technically Reits”.

The adoption of the new Reit regime comes on the back of South Africa’s disparate and inconsistent tax regime and a requirement for an internationally recognised tax dispensation within the property sector. De Klerk commented that international investors wanted a tax “format” they understood and were comfortable with.

The Reit legislation, which was published in the Taxation Laws Amendment Bill, in October, would enable further certainty, while retaining the sector’s flexibility. It would provide investor protection, ensure prudent management and promote transparency and good governance.

The new legislation was expected to push South Africa’s listed property investment in line with international trends and would drive further listings in a fast-growing sector.

De Klerk said the listed property sector had grown from a combined market capitalisation of R14-billion in 2002, to almost R200-billion in 2013, with the ten largest listed firms accounting for 80% of this.

Growthpoint itself had boosted its market capitalisation from R30-million to R48-billion during the same period, he added.

The listed property sector accounted for 3.3% of the JSE All Share Index, compared with 6.4% in Australia – one of the most developed listed property markets globally.

Further, South African Reit-like companies had, over the past decade, outperformed many Reit companies in the UK, Australia and Europe, besides others, and were currently trading at an all-time high, with an average of a 600% return from 2002 to 2012.

He further noted that South Africa’s property market “breezed” through the global financial meltdown, owing to the country’s conservative nature.

South Africa had been yield driven, rather than net-asset-value “obsessed”, while companies achieved low gearing levels of 20% to 30%.

The sector was also well capitalised with conservative but solid management, most of whom had banking backgrounds.

Further, at least 95% of all income was generated from rentals, with distributions supported by cash earnings, and 80% of the leases experienced growth of at least 8%.

Meanwhile, the new single representative body, the South African Reit Association, which was currently being finalised, was tasked with compiling best practice accounting disclosure and reporting standards to improve disclosure in the sector and make it easier for accurate comparison of different South African Reit companies.

The current Reit regime only addressed listed companies, but the regulation for unlisted companies was currently being developed.

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