New REIT regime to cut costs for investors

Posted On Thursday, 04 April 2013 10:20 Published by eProp Commercial Property News
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New real estate investment trust regime is expected also to bring greater clarity and certainty to individual unitholders.

Estienne de KlerkTHE new real estate investment trust (Reit) regime, which has been welcomed by the listed property sector, is expected also to bring greater clarity and certainty to individual unitholders.

Reit tax legislation came into effect on Monday, while the JSE listing requirements are applicable from the beginning of next month. Listed property loan stock companies and property unit trusts, which qualify and convert to Reit, will move to a new Reit board on the JSE from the start of their next financial year, while maintaining their structures.

Property unit trusts have a “participatory units” structure and already closely resemble Reits, while investors in property loan stock companies acquire linked units consisting of debentures linked to shares. Growthpoint executive director Estienne de Klerk says trading in Reit shares reduces transaction costs for investors, as there will be no securities transfer tax payable on the trade, unlike with other securities.

Reits also bring more certainty to investors in that a “secure flowthrough” of net property rentals will be distributed.  Regulatory governance assures investors that Reits have to pay out 75% of their distributable earnings per annum. Although both these companies have historically achieved this, “there’s now regulatory certainty it will happen”.

Investors are also assured that 75% of a Reit’s revenue is derived from rental from investment property and that Reits are not able to exceed 60% gearing levels, Mr de Klerk says. “One of the main selling features” of the Reit structure is the elimination of the capital gains tax faced by property loan stock companies and property unit trusts subsidiaries when selling an investment property. “This eliminates the previous double tax on both the property group and investor, and sees capital gains tax applicable only to investors.”

It will not be compulsory for property loan stock Reits to abandon the linked unit structure, but the distribution paid, whether on the debentures or on the share, will no longer be deemed to be interest under the Reit structure, but is rather considered a taxable dividend which is exempt from withholding taxes for local investors.

Mr de Klerk expects many property loan stock companies to redeem their debentures, “in effect leaving just equity”, which will “clean up the balance sheet”.  “And with the elimination of the capital gains tax on the properties, you will see some companies will have a marked increase in their stated net asset value because they don’t have a deferred tax liability.” These changes will result in a simpler, balance sheet. Furthermore, Mr de Klerk says investors of converted property loan stock companies and property unit companies will benefit from their qualification to be included in international Reit indices.

While property loan stock investors will mainly benefit from the Reit structure, as income received is no longer “interest” income, the interest-free threshold applicable to individual investors falls away. And while foreign investors will benefit from an internationally recognised system they are familiar with, their dividends will be subject to a withholding tax for the first time from January next year, he says.

Moody’s Investors Services assistant vice-president and analyst Dion Bate says the elimination of the capital gains tax on property sales and the removal of the deferred tax liability from companies’ balance sheets could see net asset values increasing 3%-17%. Mr Bate says the Reit legislation is “credit-positive for the property investment companies in SA we rate”, and “from our view, it is positive for investors”.

Patrycja Kula, business development manager at the JSE, says having a globally understood structure “will make our listed property sector much more attractive to foreign investors”, while the tax advantages of the new structure will also make the sector “much more attractive to local investors”.

Alternative Real Estate fund manager Maurice Shapiro says Reit provides clarity about the income distributed to unitholders, and the “best international practice” structure is more attractive to foreign investors. The legislation clarifies the way income and capital gains is taxed for listed property companies, which “gives investors tax certainty while it allows the companies to be more active in repositioning their underlying property holdings without negative tax implications,” Mr Shapiro says.

Last modified on Friday, 18 April 2014 10:08

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