The principle of a REIT is that it would serve as a conduit for property income that is not taxed in the investment vehicle itself but in the hands of the shareholders/investors. A transparent flow-through principle is at the heart of these structures.

At present, certain structures in the property loan stock companies could give rise to income and capital-gains taxation uncertainty and inconsistencies, and may even be challenged by SARS. This deters foreign investors who are more familiar with the REIT model.

All involved parties — bodies such as the Association of Property Unit Trusts and the Property Loan Stock Association, the treasury, the Financial Services Board and SARS — are working hard at resolving issues highlighted by the broad-based White Paper guideline for REITs, with much detail to be fleshed out and some concerns to be addressed.

Estienne de Klerk, Growthpoint executive director, says an issue to be debated is the level of regulation that the treasury intends imposing on the REIT industry.

“The treasury envisages a heightened level of investor protection under the new framework, similar to what we presently see for collective investment schemes (unit trusts).”

De Klerk says the loan-stock companies (both listed and unlisted) and the property unit trusts are negotiating with the treasury about an appropriate level of regulation for REITs.

He says that under the present broad framework two categories of REITs are proposed, prudential and nonprudential, with various investment criteria and restrictions for each class.

“We certainly acknowledge that in return for the tax certainty afforded to our industry some enhanced regulation is required. But we need to agree on just how much additional regulation is appropriate. All parties are negotiating in good faith with the common objective of finding an acceptable solution. The property loan-stock industry viewpoint is that investors in this sector are mostly institutions, pension and provident funds, and unit trusts — a very sophisticated and informed profile. Even the retail investors in this sector are highly knowledgeable and we therefore recommend that a lower level of regulation would be more appropriate. While we would welcome enhanced regulation that protects investors, it should not be so severe that it impacts negatively on this sector, particularly on the smaller participants, and stifles entrepreneurial spirit.”

De Klerk says SA’s move to a REIT structure will certainly make this sector more attractive to international investors, increasing its global acceptance and appeal.