Regulatory perversity

The listed property or real estate investment trust (Reit) sector has become a significant hoarder of the nation’s savings. Just five companies control 50% of the asset value in the sector. Concentration of economic power and its downside aside, Reits provide the case study for regulatory perversity.

All companies pay 28% income tax and then 20% dividend tax. The Reits are allowed to earn income and pay this out to their shareholders without any tax deduction — their tax rate is therefore zero. This advantage is the simple explanation for why there is a national oversupply of office blocks and shopping malls. It also substantially explains why listed property has been the fastest growing sector on the JSE.

It is also remarkable that Reits are not regulated by the Financial Advisory Conduct Authority, despite the obvious fact that they are merely listed property funds with the board and management acting in a fiduciary capacity over public investment capital. This regulatory deficit provides another perverse arbitrage in that a JSElisted Reit is practically unlimited in its ability to raise money in SA and invest it into property holdings overseas.

On average, South African Reits have about 30% of their investments offshore while raising more than R26bn in new equity from new listings, dividend reinvestment plans, M&A and secondary placement. This loophole is not open to any other class of asset manager and the sector has taken significant advantage.

Dr Rabelani Dagada Founder, GrandPoint Capital