1 August 2012
The new Real Estate Investment Trust (REIT) structure, scheduled to become available to the South African property sector in early 2013, will both benefit local property structures and increase foreign investment opportunities, according to consultancy Grant Thornton.
The adoption of the REIT structure, which is recognised in most key property markets internationally, will revive South Africa’s current systems, which are dated and often tedious, through the introduction of a scheme that has been tried and tested internationally, Grant Thornton said last week.
At the same time, the REITs will “bring about much-needed tax and regulatory changes that local property structures could certainly benefit from in the long term,” the company said in a statement.
Treasury, SA Revenue Service lauded
The National Treasury’s proposal to introduce this listed property investment regime, aimed at aligning the South African listed property sector with its international counterparts, will also create a more attractive investment structure, significantly enhancing international interest.
AJ Jansen van Nieuwenhuizen, head of tax at Grant Thornton Johannesburg, said the main reason for the overhaul “is because existing local structures, property loan stocks (PLS) and property unit trusts (PUT) are unevenly regulated and subject to different tax treatments, prompting the need for a shared set of regulations.
The Tax Amendment Bill proposing REITs, which was tabled in July, will unify the approach to local property investment schemes and provide greater certainty for international investors.
“The proposed tax framework reflects that global best practice for REITs has been carefully considered, and National Treasury and Sars [the South African Revenue Service] should be commended for taking international considerations into account,” Jansen van Nieuwenhuizen said.
International lessons learnt
“Some of these lessons were clearly learnt from the UK REIT regime, which at first levied a conversion charge of 2% of the value of the property portfolio of REITs wanting to convert and limited the REITs’ listing to the main exchange.”
In an effort to be more competitive with other REIT markets like Australia and the US, the UK dropped the conversion charge, has expanded listings to the AIM exchange, and has temporarily relaxed the gearing limits.
According to Grant Thornton, South Africa’s draft proposals do not contain any of these onerous provisions.
Jansen van Nieuwenhuizen said the new framework would modernise the rules governing South Africa’s property investment regime and attract foreign investment.
PUT and PLS structures that comply with the proposed REIT requirements will benefit from certain tax dispensations, specifically, an exemption from capital gains tax (CGT).
“These tax features are certainly strong benefits of the proposed structure,” Jansen van Nieuwenhuizen said.
He also pointed out that a company wishing to register as a REIT had to be listed, or intend to list, on the Johannesburg Stock Exchange (JSE) and comply with all listing regulations.
At present, there are no listing requirements for PUTs, although they are regulated closely by the Financial Services Board (FSB).
“The introduction of REITs will expand the investment options available to those PUT structures that elect to register.”
Despite the increased flexibility, tradability and tax relief offered by REITs, Jansen van Nieuwenhuizen said that PUTs and other property investment entities would have to consider the increased administrative and regulatory burden of listing before making a decision.
REIT-registered companies will have to satisfy four additional requirements, according to Grant Thornton.
“The levels for each requirement are yet to be finalised, but as it currently stands, companies must have a minimum gross holding of direct or indirect property assets of R300-million.”
In addition, a REIT “must distribute at least 70% of its profits annually, and its gearing is limited to 60% of net asset value.”
A PLS, South Africa’s more dominant vehicle for property structures, is a share-linked debenture structure that is indivisibly tradable on the JSE and taxed at a normal rate of 28% with an effective CGT rate of 18.6%.
Under the PLS structure, most profit is paid out to investors as interest, which is tax-deductible in the PLS and taxable income in the hands of the investor, meaning that the PLS vehicle attracts low levels of income tax.
“Yet in substance, the revenue authorities have always contended that the distribution is more akin to profit than interest, and this contradicts general tax principles,” Jansen van Nieuwenhuizen said.
The new framework will improve the tax treatment for PLSs, seen to be problematic and a major factor behind the proposal to introduce REITs in South Africa.
Grant Thornton advises companies looking to register as REITs in South Africa to ensure that they adhere to all of the requirements to avoid profits being taxed. “Similarly, each merger or acquisition must be closely examined to ensure that the target does not compromise the company’s REIT status.”