South African commercial property giants are expected to line up in numbers for a conversion into the Real Estate Investment Trust (REIT) structure, a new tax regime that promises to revolutionise the investment property sector.
On the 1st of May 2013, the JSE will open its doors for applications from listed property funds who want to take advantage of the new tax regime, SA REIT. This movement can be seen as an offshoot of a broader movement to flush out tax dodgers in complex financial structures but also creates tax certainty around South African property funds.
The JSE is positioned as a pioneering platform for the introduction of the REIT structure in South Africa. This is expected to firm up the position of listed property as distinctive asset class. “What makes listed property a distinctive investment class is that it gives investors two ways to beat inflation – capital investment growth and regular rental income distributions,” said Estienne De Klerk, Chairman of the SA REIT Association Committee. “This also makes it an important diversifier in any investment portfolio.”
This does also mean that a significant portion of South Africa’s commercial property, valued at more than R200bn stands to be impacted by this movement. The JSE houses about 30 property funds which own some of the most prestigious properties in the country. These will include properties like the Cape Town V&A Waterfront, Canal Walk, Hemingsway Mall, Eastgate etc.
It is expected that the new structure will find its way into the broader investment property sector. The development comes after the National Treasury amended the tax laws allowing for the recognition of a globally standardised tax structure for property funds. This was followed by the drafting of new JSE listing requirements for property funds who want to qualify as a REIT. These rules are now ready to be applied.
In a statement released recently the SA REIT Association Committee, a precursor of a fully fleshed association, said the SA REIT is one of the most flexible REIT regimes internationally and a significant development for South Africa’s publicly traded real estate sector. The SA REIT provides a simple, clear tax structure.
The body added that more than 25 countries in the world use a similar REIT model like the US, Australia, Belgium, France, Hong Kong, Japan, Singapore and the UK.
De Klerk, who also serves as executive director of the largest JSE listed property fund, Growthpoint Properties said “Because the SA REIT dispensation provides many benefits, the foremost of which is tax certainty, it is likely that all qualifying South African listed property entities will make application to the JSE to become a REIT”.
This means there could be around 30 SA REITs by this time next year.
Patrycja Kula Business Development Manager at the JSE said “The REIT structure is in line with international best practice and having a globally understood structure will make our listed property sector much more attractive to foreign investors. The tax advantages of the new structure will also make the listed property sector much more attractive to local investors”.
Added Kula “When South African listed property funds convert to this system South Africa will be the eighth largest REIT market.”
De Klerk explained that currently South Africa has two forms of listed property investment entities, property loan stocks companies (PLSs) and property unit trusts (PUTs). Both will be able to adopt a regulatory framework set out by the JSE and qualify to list on the REIT board of the JSE.
The association said the JSE has set out simple rules to list as a REIT. First a SA REIT must own at least R300 million of property. It must keep its debt below 60% of its gross asset value. It must also earn 75% of its income from rental, or from property owned or investment income from indirect property ownership. It must have special measures in place to monitor risk and must not enter into derivative instruments that are not part of the ordinary course of business. Finally, a SA REIT must pay at least 75% of its taxable earnings available for distribution to its investors each year.
PLSs and PUTs will need to apply to the JSE to be listed on the REIT board, showing they comply with all the requirements and committing to the ongoing obligations, by 1 July 2013.
Once the PLS or PUT is listed as a REIT on the JSE it will be known as a ‘Company REIT’ or a ‘Trust REIT’, respectively. It will then qualify for the REIT tax dispensation provided under the new Taxation Legislation Amendment Bill Sec 25BB.
The association added that this new tax dispensation means a SA REIT can deduct all distributions paid to shareholders or linked unit holders as an expense. So, if a REIT pays all its distributable earnings to shareholders, it shouldn’t have to pay any tax. “It becomes a conduit for net property rental income and provides investors an investment alike to direct ownership of the underlying property,” said De Klerk.
When a SA REIT sells a property it does not have to pay Capital Gains Tax (CGT) on any profit from the sale. Also, shareholders of an SA REIT won’t pay Securities Transfer Tax (STT) on buying or selling SA REIT shares.
South African investors will receive gross distributions from a SA REIT without the 15% dividends tax being levied against the distribution. But investors will have to pay tax on the distributions at their applicable marginal income tax rate when they include it in their taxable income. This also provides investors the opportunity to use debt effectively to fund the acquisition of their REIT investment on a pre-tax basis.
If invested in SA REITs as part of a RA or pension, provident and preservation fund, investors effectively pay no tax on dividends. Foreign shareholders of SA REITs will be levied a dividend withholding post 1 January 2014 – the current rate is 15% or the applicable double tax agreement rate could apply.
The committee statement said should all eligible SA listed property entities be listed as per the SA REIT requirements, it is expected to place South Africa in the top 10 REIT jurisdictions in the world. This will put the sector more firmly on the radar of international investors and boost its representation on global REIT indices.