REITs were originally created in the US in 1960 to afford people the opportunity to invest in large-scale commercial properties in a tax-efficient manner and a legislative framework was set up for them to operate. In more recent times, numerous countries, including Australia, Belgium, France, Hong Kong, Japan and Singapore, have established a legal framework for REITs for investing in commercial and residential property, in most instances only in the last ten years. The UK is introducing REITs from January 1 next year.
Looking at what constitutes a REIT is easier said than done. Obviously, with tax regimes and laws differing between countries, the structure of a REIT can vary quite markedly between them, so there is no single global entity which bears the name REIT. Rather, there are a host of different REIT structures around the globe.
However, spokesperson for the Association of Property Unit Trusts (APUT), Craig Hallowes, says: “There are a number of common features, which include the distribution of income from the property investments in the form of a net rental or an interest distribution, which is taxable in the investor’s hands; restrictions on the type of assets that the trust invests in (typically, types of property investments); guidelines on the amount of income that needs to be distributed; and limitations on the level of debt on the balance sheet.”
Significantly, a REIT is a well-established model for listed property investments and is the prevailing global model. Typically, REITS are investment structures that have various portfolio mandates, from pure commercial property (such as retail centres, industrial parks and offices) to oil-supply pipelines, with favourable tax dispensations in their jurisdictions to allow investors, such as retirement funds, to get the benefit of asset-based income streams without the risk of double taxation in the hands of the REIT and the investor. The transparent tax structure means that the full net income from the properties flows through to investors, with no corporate tax being paid at the company or trust level. Investors would then pay tax at whatever rate is their own marginal rate.
“Although the structure, regulatory issues and tax considerations vary from country to country, REITs the world over offer the same investment proposition – they are total return investments that typically provide relatively high and growing yields in the form of distributions, plus the potential for long-term capital appreciation.” he says. PUTs and REITs are, in fact, very similar. Leon Allison, an analyst at Macquarie First South concludes that: “PUTs are effectively REITs, (while) Property Loan Stocks (PLS) are not dissimilar to REITs in other countries, sharing the key characteristic of being tax-transparent property vehicles.”
So converting PUTs to REITs would not be a major step for the instruments. APUT will be engaging with the Financial Services Board (FSB) and the trustees of the respective PUTs to relax certain restrictions currently imposed on PUTs, which would result in them becoming de facto REITs. Essentially, APUT would like to see greater flexibility in the level of gearing permitted and the potential to own units and shares in other listed funds. These steps would improve the marketability of PUTs, which should have a positive impact on prices. Whether the individual PUT funds convert to REITs is a decision each fund will make independently once the terms of conversion are clear and the interests of unit holders are taken into consideration.
What a conversion to REITs would do, is bring consistency to the SA market and benchmark it to global best practice. As Hallowes states, there is “product equity” in the term “REIT”, which would benefit PUTs. With foreign shareholding in SA listed property currently at a paltry 2%, compared with other general equity sectors of between 25% and 50%, there is potential (although no guarantee) for more foreign buying of listed property on the JSE Securities Exchange.
Hallowes says investors all over the world view REITs as attractive additions to investment portfolios because of their relatively low correlation to other market sectors. Further, research has shown that the inclusion of various asset classes - in the form of equities, bonds cash and real estate, which have varying correlations - is essential to the construction of a well-diversified portfolio that reduces overall volatility and risk.
One of the attractions of REITs is their high degree of regulation. However, in South Africa, PUTs are already highly regulated, providing a stable and secure investment, rarely found in most equity investments. Under the auspices of the Registrar of Collective Investment Schemes – an FSB function – and the JSE Limited, PUTs are governed by the Collective Investment Schemes Control Act, as well as the JSE’s listing requirements. In addition, the affairs of the management companies which administer the PUTs are regulated by a Trust Deed between the management company and a trustee.
