Trusts boost local property market
New opportunities provided for foreign investment onto the JSE
AT A time when SA urgently needs foreign investment, the advent of the country’s Real Estate Investment Trusts (REITs) legislation is a welcome development for the property market.
Investors in the US, UK and Japan, among others, know what REITs are and are very comfortable with them. Now that SA has REITs too, new opportunities have opened up for investors from these countries.
A REIT is defined as a resident South African company listed on the JSE, the shares of which are listed in accordance with JSE listing requirements for REITs. One of these requirements is that 75% of a REIT’s rental and dividend income from property investments must be distributed directly to its investors.
Since SA’s REITs legislation came into effect on 1 April 2013, there has been a marked upsurge in interest among potential investors, particularly from the US. Many want to test the South African market. This comes at a good time considering the lack of growth in our property market for the past three years.
REITs are the international standard for property investment vehicles and have existed in the UK and Japan since the early 1980s, and even longer in the US.
The mere fact that SA also has an investment mechanism called REITs makes our property market, specifically existing listed property companies, significantly more attractive.
However, the advent of REITs is more than just a cosmetic change. It has also levelled the playing field in terms of the tax treatment of listed property companies in SA. For the first time, we have the same set of rules for every listed property company. It is hoped these rules may be extended to unlisted companies in the future.
In terms of income tax treatment, REITs do not pay capital gains tax when they sell shares in other REITS, in controlled property companies or if
Property loan stock companies do need to apply to the JSE for REIT status
they sell immovable property
Non-resident investors in SA REITs will be subject to dividend withholding taxes on distributions from the REIT dividends after 1 January 2014.
The amount of the dividend withholding tax may be reduced by double tax provisions. South African resident investors in a REIT pay normal income tax on income they receive from the REIT and capital gains tax when they dispose of their interests in the REIT (if the interests are held by them as capital assets).
Previously, there was differentiated tax treatment for the two former types of listed property companies in SA: collective investment schemes and property loan stock companies.
Collective investment schemes were similar to REITs in that their rental and dividend income from property investments flowed directly to their investors. Also, these schemes did not pay capital gains tax when the scheme sold shares or property. Instead, like REITS, the investors were taxed on the income distributed to them and the investors paid capital gains tax when they disposed of their interests in the REIT (if the interests were held by them as capital assets).
Property loan stock companies were treated quite differently.
Firstly, they were taxed as normal companies, meaning they did pay tax when shares or property were sold.
Secondly the investors, who held an equity share and a linked debenture in the company, were taxed on interest on the debenture.
Hence, the new dispensation appli- cable to REITs will most likely benefit these property loan stock companies the most.
Previous deferred tax raised due to their property holdings could be reversed in their annual financial statements, depending on the auditors’ interpretation of the effect of the new REIT legislation and regulations.
Collective investment schemes in immovable property are being converted to the new REIT format provided they meet the qualifying criteria.
Property loan stock companies, on the other hand, do need to apply to the JSE for REIT status.
Property loan stocks may go through a restructuring process to convert their linked units into regular shares. For them, it will be important to structure the investment so that it is tax efficient and meets the legal requirements. Considering the benefits of becoming a REIT, both from a tax perspective and the increased interest they are likely to attract from investors, this is likely to prove to be worth the effort.