Reit status large tax benefits to the sector

Posted On Tuesday, 17 June 2014 13:50 Published by
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Most of SA's listed property funds convert to real estate investment trusts, moving them in line with global tax practice and putting them on the global map.

 Laurence Rapp

"Reit status is large tax benefits to the sector‚" said newly appointed South African Reit Association chairman Laurence Rapp‚ the CEO of Vukile Property Fund. "It is in line with worldwide best practice‚" Mr Rapp said at the South African Property Owners Association international convention in Cape Town last week.

He said South Africa's listed property sector was now on the international radar and foreigners would buy into South African property funds. "We are left the challenge to gain size and liquidity in this industry."

The JSE adopted the Reit structure in May last year. By the end of this year‚ about 30 South African property funds will be Reits. Reit replaces the property loan stock and property unit trust structures and creates a uniform tax dispensation for the South African listed property sector. Property loan stock and property unit trust had created confusion among investors as they were taxed differently.

With a market capitalisation of about R250bn‚ South Africa's listed property sector is ranked at about eighth or ninth in the top 10 Reit markets by size globally. It was worth just R5bn 12 years ago. South Africa's largest property company‚ Growthpoint‚ has a market capitalisation of about R54bn‚ up from R30m when it listed in 2002.

Its conversion to a Reit has made it the 40th-largest Reit globally by market capitalisation‚ and the largest emerging market Reit. Still‚ the sector is relatively young and wants tax rules aligned with other property industries in the world. Property becomes a separate asset class in terms of tax rules in South Africa‚ as it is in other countries.

Any property company listed on the JSE before November 30 2012 may convert to Reit status at the start of its financial year‚ provided it owns gross assets of at least R300m; has a gearing level not exceeding 60%; and pays out at least 75% of its total distributable profits as a distribution at regular intervals.

The Reit structure removes various tax difficulties. Property loan stocks used to pay capital gains tax on property sales and were in effect double taxed. The subsidiaries of property unit trusts used to pay capital gains tax when they sold properties. This extra tax is removed for both types of funds. There is also no capital gains tax on mergers and distributions on shares‚ and debentures are tax deductible expenses. Also‚ new property companies will not pay tax when they list.

These benefits have buoyed consolidation. Sister property owner companies which share a management company‚ such as Acucap and Sycom‚ and Octodec and Premium‚ can now merge at a lower cost. Acucap (ACP) and Sycom's (SYC's) merger is in the works‚ while Octodec (OCT) and Premium (PMM) announced their merger terms last week.

Last modified on Tuesday, 17 June 2014 15:44

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