Reits structure 'would ease tax for loan stocks'

Posted On Thursday, 17 August 2006 02:00 Published by
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The property loan stock structure in SA could have serious tax implications for listed property companies, says Spearhead CEO Mike Flax
By Nick Wilson

The property loan stock structure in SA could have serious tax implications for listed property companies, says Spearhead CEO Mike Flax.

Flax, speaking yesterday at a Real Estate Investment Trusts (Reits) conference hosted by the Property Loan Stock Association, said the structure could be "devastating to the ability" of listed property loan stock companies to make distributions in the short to medium term.

Flax said the adoption of the globally accepted Reits structure would remove capital gains and revenue tax from these companies and pass the tax burden on to their unit holders.

The leading Reits market is the US. Listed property companies in Europe have also adopted the structure.

SA is one of the few countries with a listed property sector that has not adopted it.

The Property Loan Stock Association, which is hosting the conference to boost awareness about Reits and garner support for the trusts' introduction in SA, says Reits combine the best aspects of property unit trusts and property loan stock companies.

Flax said provisions for capital gains tax by property loan stock companies now totalled "billions of rands".

Reits legislation in SA would allow the release of these provisions and make the sector more popular with all investor classes, he said.

Another pressing issue was the possible restriction on interest deductions by the South African Revenue Service, he said.

Flax said property loan stock companies had linked units, with each linked unit consisting of a debenture and a share.

"The way (property loan stocks) pay out profits is to clear them out as interest on the debenture portion of the unit,' he said.

"What's happened is that profits have risen to such a degree that the interest rate on the debentures has risen to a level that may be unacceptable to the receiver," said Flax.

He said in some cases companies were paying out a rate of 30% on the debenture portion and the receiver was now questioning this practice.

Flax said there was a moratorium on the receiver disallowing a portion of the interest for tax deduction, pending final agreement on a new structure for these companies.

He said this should be a Reits structure.

Flax said SA would never attract global investors unless it adopted the Reits structure because it was a global standard and investment was a "global game played by global players".

He said 3% of listed property units on the JSE were in foreign hands and market commentators believed there was potential for as much as 20% to be in foreign hands.

Sam Zell, chairman of Equity Group Investments in Chicago, said at the conference that the Reits structure "really took off" in the US in 1992.

Back then, there were about four countries that had adopted the structure. Today, there are 30, he said.

He said it was important for the South African listed property sector to adopt the Reits structure to attract "capital around the world".

Reits created a uniform and simple structure that helped liquidity, "and liquidity equals value", Zell said.

Business Day
Publisher: I-Net Bridge
Source: I-Net Bridge

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