Budget Offers Some Good News For Put Investors

Posted On Wednesday, 28 February 2007 02:00 Published by eProp Commercial Property News
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The Budget presented by the Minister of Finance Trevor Manuel to parliament on 21 February has some very positive implications for the listed property market.

Leon AllisonFirstly, from a tax perspective, Property Unit Trust (PUT) income has always been treated as interest and is therefore taxable in the hands of the investor. For the 2007/08 tax year, the Minister raised the exemption for interest income to R18,000 (from R16,500) for investors under 65 years and to R26,000 (from R24,500) for individuals aged 65 and older.

 
Secondly,this means that for someone under 65, at a yield of 7%, an investor can own over R257 000.00’s worth of PUTs before the income becomes taxable.

Although this will impact indirectly on PUTs, the Budget introduced depreciation on commercial buildings. The Income Tax Act already provides for depreciation on buildings used for manufacturing and similar processes, but it does not allow for tax depreciation on certain buildings. Treasury intends introducing a 5%/year depreciation allowance for the economic wear-and-tear of newly constructed commercial buildings (and upgrades) – in effect a write-off period of 20 years.
 
This will benefit tax-paying landlords and result in a better after-tax yield for the industry. But, as Macquarie First South property analyst Leon Allison points out, this should make it more attractive for the companies to own their own properties rather than to sell them to the listed funds (which are not directly affected by the allowance as they do not pay tax).

“This is likely to make the properties marginally more expensive to buy, but the PUTs are likely to get a marginally better price if the property is sold to a tax-paying entity,” states Allison.

The Budget also proposed the abolition of stamp duty on short-term leases of less than five years. While the duty is generally paid by the tenants, this move will help to simplify the letting process.

Although the overall impact of these changes is not massive, they could lead to a small increase in the value of commercial property.

Thirdly, in a very favourable move, retirement fund tax (RFT) is being abolished with effect from 1 March 2007 in a further step in the proposed reform of retirement funds.
RFT has been payable only on interest and rental income, making investment in property and interest-bearing instruments less attractive to the industry. Its abolition should make the retirement fund industry, which had already started to raise investment in property, even more keen to do so which should flow through to higher PUT prices.

Listed property, in particular, is likely to become more attractive to retirement fund asset managers. Many of the institutional asset management companies do not invest the funds which they manage in direct property, but rather acquire exposure to the industry via listed property.

There are liquidity benefits to investing in the listed market rather than holding direct property investments – the units can easily be sold in the market. In addition, it affords the investor a diversified property investment without the administrative issues involved. There is also specialist expertise required for property investing, which is well-served by the PUT vehicles.

“In general, this is a good budget for listed property,” comments Craig Hallowes, spokesman for the Association of Property Unit Trusts, “and we expect the sector to continue to show strong performance. This fundamental attractiveness of investing in property unit trust has further been enhanced by the budget and we look forward to a positive 2007.for investors.”

Last modified on Friday, 25 April 2014 19:24

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