Common structure gives investors confidence in Reits

On May 1 this year, South Africa’s listed property sector was brought into line with international standards for listed property when the JSE launched a real estate investment trust (Reit) sector.

Reits are listed companies that own rentalproducing property and distribute rental income, in the form of taxable interest, to the holders of shares or units.

Estienne de Klerk, president of the South African Property Owners’ Association and executive director of Growthpoint, says that Reits will eventually replace listed property unit trusts (PUTs) and property loan stock (PLS) companies, simplify taxation and enhance fund governance. Growthpoint is the largest listed property company in South Africa.

Reits are listed on some 25 international stock exchanges. They have similar rules and structures, giving investors confidence when they invest in property in a foreign market.

Reits are structured so that no income tax is payable on rental income in the hands of the listed company and no capital gains tax is paid on a gain from the sale of property owned by the company.

Distributions, in the form of interest, are taxed in the hands of shareholders from the first cent – there are no tax exemptions on interest or rental earnings (except for retirement fund investors). This is in line with government’s move away from tax exemptions on interest, which it proposes to replace with taxincentivised savings accounts for individuals.

In South Africa, Reits invest predominantly in retail, office, industrial, hotel and hospital properties; their exposure to residential property is limited.

Tower Property Fund, launched by Spire Property Group, this week became the first property fund to list on the JSE under the Reit structure, joining 16 companies that listed as either PUTs or PLS companies and have now converted to Reits.

The market capitalisation (value of all issued shares) of the JSE property sector grew from R61 billion at the end of June 2003 to R328 billion at the end of June 2013.

There are 45 property companies on the JSE, accounting for 3.8 percent of the stock exchange’s total capitalisation.