Implications of REIT structure for SA listed property

Posted On Thursday, 26 July 2012 14:08 Published by
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The proposed tax and regulatory framework for Real Estate Investment Trusts (REITs), expected to become available in South Africa early in 2013 is considered a best-in-breed structure that will see the introduction of a shared set of regulations and attractive tax benefits for existing local property investment vehicles – Property Loan Stocks and Property Unit Trusts

 

The new Real Estate Investment Trust (REIT) structure which is scheduled to become available to the SA property sector in early in 2013 will certainly benefit the current local property structures and simultaneously increase foreign investment opportunities.

The adoption of the REIT structure, which is recognised in most of the key property markets internationally, is set to revive the nation’s current systems which are dated and often tedious through the introduction of a scheme that has been tried and tested internationally.

The REITs will simultaneously bring about much needed tax and regulatory changes that local property structures could certainly benefit from in the long term.

The National Treasury’s proposal to introduce this listed property investment regime is aimed at aligning the South African listed property sector with its international counterparts, which will also create a more attractive investment structure to enhance international interest.

“The main reason for the overhaul is because existing local structures, property loan stocks (PLS) and property unit trusts (PUT) are unevenly regulated and subject to different tax treatments, prompting the need for a shared set of regulations,” says AJ Jansen van Nieuwenhuizen, head of tax at Grant Thornton Johannesburg.

The Tax Amendment Bill proposing REITs - which was tabled in early July - will unify the approach to local property investment schemes and provide greater certainty for international investors.

“The proposed tax framework reflects that global best practice for REITs has been carefully considered and National Treasury and SARS should be commended for taking international considerations into account,” he says.

“Some of these lessons were clearly learnt from the UK REIT regime, which at first levied a conversion charge of 2% of the value of the property portfolio of REITs wanting to convert and limited the REITs’ listing to the main exchange.”

In an effort to be more competitive with other REIT markets like Australia and the USA, the UK dropped the conversion charge, has expanded listings to the AIM exchange and has temporarily relaxed the gearing limits.

South Africa’s draft proposals do not contain any of these onerous provisions and we have therefore benefitted from the lessons that other countries have learnt in the last few years.

Jansen van Nieuwenhuizen says that the new framework is a welcome change that will modernise the rules governing South Africa’s property investment regime and attract foreign investment.

PUT and PLS structures that comply with the proposed REIT requirements will benefit from certain tax dispensations, specifically, an exemption from capital gains tax (CGT).

“These tax features are certainly strong benefits of the proposed structure,” adds Jansen van Nieuwenhuizen.

He also points out that a company wishing to register as a REIT must be listed or intend to list on the Johannesburg Securities Exchange (JSE), and comply with all listing regulations.

At present, there are no listing requirements for PUTs, but they are regulated closely by the Financial Services Board (FSB).

“The introduction of REITs will expand the investment options available to those PUT structures that elect to register,” he says.

Despite the increased flexibility, tradability and tax relief offered by REITs, he says that PUTs and other property investment entities will have to consider the increased administrative and regulatory burden of listing before making a decision.

REIT-registered companies will have to satisfy four additional requirements.

The levels for each requirement are yet to be finalised, but as it currently stands companies must have a minimum gross holding of direct or indirect property assets of R300 million.

A REIT must distribute at least 70% of its profits annually and its gearing is limited to 60% of net asset value.

A PLS, South Africa’s more dominant vehicle for property structures is a share-linked debenture structure that is indivisibly tradable on the JSE and taxed at a normal rate of 28% with an effective CGT rate of 18.6%.

Under the PLS structure, most profit is paid out to investors as interest, which is tax deductible in the PLS and taxable income in the hands of the investor, meaning that the PLS vehicle attracts low levels of income tax.

“Yet in substance, the revenue authorities have always contended that the distribution is more akin to profit than interest and this contradicts general tax principles,” he adds.

The new framework will improve the tax treatment for PLSs, seen to be problematic and a major factor behind the proposal to introduce REITs in South Africa.

Companies looking to register as REITs in South Africa must ensure that they adhere to all of the requirements to avoid profits being taxed. Similarly, each merger or acquisition must be closely examined to ensure that the target does not compromise the company’s REIT status.

“The introduction of REITs in South Africa will improve liquidity, making the local market more attractive to international investors,” he concludes.

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