“I definitely see a strong pipeline of unlisted property entities looking to list on the Johannesburg Stock Exchange (JSE) in order to take advantage of the Real Estate Investment Trust (REIT) structure,” Sibanda, a partner in the Mergers and Acquisitions Practice told CNBC Africa on Friday.
According to the JSE[DATA JSE:JSE LTD.], REIT's are tax advantaged investment vehicles that invest in and derive their income from real estate properties and mortgages. REIT's profits are distributed pre-tax and then taxed in the investors’ hands.
As of the 1st April 2013, all property loan stock (PLS) companies and property unit trusts were converted to the REIT structure. Also, any new listings in the property sector would have to comply with the JSE REIT listing requirements.
“What this structure does is remove the tax uncertainty that existed in the former PLS structure as capital gains tax liability no longer applies,” said Anton De Goede from Coronation Fund Managers [DATA CML:CORONATION FUND MANAGERS LTD.]
This is, therefore, what causes its attractiveness to local investors.
In addition, the REIT structure is in line with international best practice and due to its global understanding, South Africa’s listed property sector will be more attractive to foreign investors.
“Due to the fact that the South African property sector will be formally REIT, they will be included in some international indices. Also, international investors will start looking more closely at the South African sector,” stated De Goede.
Sibanda also mentioned that another benefit that investors can expect is that they no longer have to pay security transfer tax when buying or selling property shares.
An indirect benefit for investors, he added, would be that due to the removal of capital gains tax, capital accumulation will occur and result in future revenue growth.
“Ultimately, shareholders will have more money in their pockets.” Said Sibanda.
On the other hand, Sibanda added, income that is made from property entities will be taxed according to the investor’s marginal tax rate.
In other words, Dividends earned will be deemed normal income in the hands of a South African resident investor and will be taxed at the marginal tax rate applicable to that investor.
De Goede also pointed out that a withholding tax of 15 per cent, which wasn’t included previously, will now be levied from any income from REIT’s.
“That is the only curve we had from this structure but I don’t think that it will impact investors’ decision too much because withholding tax is already an international norm”, he stated.
To qualify as a REIT fund, companies need to have a minimum of R300 million in assets, a total debt to asset ratio of no more than 60 per cent, 75 per cent income from property rentals and a distribution minimum of 75 per cent of the distributable profits (dividends).