Introduction of Reits is good news for investors
28 June 2013
Posted by: Author: Ken Reynolds
Author: Ken Reynolds (Executive — Nedbank Corporate Property Finance)(bdlive.co.za)
The introduction of real estate investment trusts (Reits) to the South African property investment landscape will have a positive effect on investors, especially with regard to tax efficiency, certainty of income distributions and bringing the country into line with international standards.
Essentially, Reits are tax-advantaged investment vehicles that invest in and derive their income from real estate properties and mortgages. Their profits are distributed pretax, with taxation only applicable in an investor’s hands.
By moving to the internationally recognised Reit structure, and away from the property loan stock and property unit trust format, South Africa is falling into line with international practice, which could encourage foreign investors to invest in South Africa’s largest listed property counters.
Importantly, Reits will make it easier and more attractive for property companies to merge and consolidate their assets as capital gains tax will not be payable when such transactions take place. This could lead to more property companies merging, providing bigger and more liquid counters for investors to consider as part of their portfolios.
Making it easier and much more tax efficient for property companies to merge and consolidate is a major development that should affect merger and acquisition activity in the property arena.
The "pass through" tax status of Reits enables them to distribute a greater portion of their income via distributions to investors. As income often comes from commercial properties with long lease periods, Reits can offer a relatively predictable revenue stream. They are also suitably structured to combat inflation. Unlike bonds with predetermined rates of interest, which lose value in times of high inflation, Reits with escalating rental incomes can adjust to cater for inflation.
While Reits are still in the process of being introduced into the South African market, and conversions are still taking place, it is likely that new property companies that come to the market will mainly be Reits, aiming to distribute income to their shareholders as efficiently as possible.
Apart from tax advantages relating to capital gains and income distribution, Reits have another benefit over property units trusts in that they can utilise the services of an internal management company and do not require an external management company. Investors favour internal asset management firms.
Overall, Reits will be positive for the South African listed-property sector and for local investors seeking longer-term capital growth and reasonable distribution certainty. Due to the relatively small market capitalisations of South Africa’s listed property stocks, further consolidation in the sector could spark more investment interest from foreign investors.
Despite several structural changes — mainly related to the treatment of taxation — Reits will be rated and judged on the quality of their distributions to shareholders.
When it comes to commercial property financing, the introduction of Reits will not really have an impact on this area, as financing will remain a competitive and dynamic part of the property investment chain of processes and events.