Reit IPOs — the new tax game?
Property is bucking the delistings trend, but that may have more to do with tax benefits than a sector rebound
● A slew of general equity companies delisted from the JSE last year — or are looking to do so in future — seemingly due to ongoing pressure on share prices, a limited ability to raise further capital and high costs to remain listed.
But one sector is bucking the trend: real estate.
Last year two new property stocks made their JSE debut, and a third is on its way. Rand hedge counter Deutsche Konsum ReitAG, a German-based convenience centre owner, listed in March, while Afine Investments joined the bourse’s AltX in December.
Afine is the first SA-focused real estate investment trust (Reit) to offer local investors access to the rental income streams generated by petrol service stations. But it’s still small, with a market cap of only R272m. The company was co-founded by SA-born Mike Watters, who was previously the CEO of UKbased RDI Reit, and SA developer Petroland Group.
A first-of-its-kind specialist infrastructure Reit, Gaia Fibonacci Fibre, which invests in fibre-optic cable networks, also went public in December. It listed on the Cape Town Stock Exchange (the former 4AX) with an initial investment of R34m.
Then last week, hospitality-focused aReit Prop issued a prospectus saying it intends to list on the main board of the JSE in February.
News of its intended debut sparked a lot of head-scratching among JSE pundits. For a start, the company owns only three Cape Town properties: Cresta Grande Hotel and Fountains Hotel in the city centre and the Lady Hamilton medical facility in Gardens. Yet this portfolio comes with a fairly heady valuation of R914m, despite generating just R36.96m contractual annual rental income, according to its prospectus. That suggests an income yield of just more than 4%.
The company hopes to issue 30-million shares at a median target price of R9 a share through through a private placement, which closes on January 31. The company plans to list 100-million shares on February 14..
This relatively low initial yield, compared with the current sector average of about 8% — and coupled with a rather “obscure” portfolio, as one anonymous commentator puts it — does raise questions: why list now, and why list at all?
There is a view that the current flurry of property listings is primarily driven by the tax benefits offered by the Reit structure. Shareholders of an SA Reit do not pay securities transfer tax when buying or selling shares. When a Reit sells a property it also doesn’t have to pay capital gains tax on profit from the sale. These tax incentives apply only to listed Reits, not to unlisted ones.
Keith McLachlan, smallcap expert and investment officer at Integral Asset Management, says a common thread of the new property listings is that they are “extremely small and extremely illiquid”. He says: “One does wonder what economic value new Reit counters offer if they are merely listing for tax purposes.”
McLachlan points out that once a company complies with all the JSE’s listing requirements it’s up to individual investors to decide where they want to put their money. He adds: “In theory, it’s always better for JSE investors to have more rather than fewer investment options. However, in practice, if a new listing is too small it won’t excite institutional investors.”
Howard Penny, equity research analyst at Anchor Stockbrokers, agrees that smaller Reits that aren’t included in the SA listed property index (Sapy) battle to attract institutional investor interest. “They don’t form part of the underlying benchmark and can effectively be ignored by many investors.”
Nevertheless, Penny says interest in listed property as an asset class has picked up noticeably now that the sector is starting to emerge from the worst of its pandemic battering, with balance sheets by and large restored.
That’s underscored by the 74% recovery in the Sapy from its March 2020 lows, which Penny believes has encouraged recent new listing activity. He expects more of the same in the year ahead.
He says a trend to watch is that of existing Reits potentially spinning out a portion of their portfolios to create smaller, specialised funds. “In time, inward listings could also be back on the radar,” he says.
Ridwaan Loonat, senior property analyst at Nedbank CIB, also expects further corporate action in the form of mergers & acquisitions and new listing activity in the Reit sector. “Companies are more comfortable with their gearing levels and cash flow generation; the pandemic created mispricing in some,” he says.
More specialist listings that focus on nontraditional real estate sectors are particularly likely to come to the fore. “Investors are
looking for access to growing segments that offer strong diversification benefits, scale and liquidity, which are not readily available in SA,” he says.
One such listing that could make its way to the JSE, albeit probably only in a few years’ time once it has bulked up its assets sufficiently, is Growthpoint Properties’ new student housing business. The unlisted Reit will be launched officially later this month at an estimated asset value of about R2bn.
Not such small fry.
Investors are looking for access into growing segments that offer strong diversification benefits, scale and liquidity
Ridwaan Loonat