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Tax benefits in new SA REIT structures

Posted On Monday, 13 May 2013 09:23 Published by Commercial Property News
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IN A move to bring South Africa’s listed property sector in line with international standards, simplify tax handling and enhance governance, investors have been able to put money into real estate investment trusts (REITs) on the JSE since May 1.

Estienne de Klerk SA REIT ChairmanREITs are investment structures that own underlying income-producing property and distribute rental income to the holders of shares or units.

They will sit alongside — and ultimately replace — existing listed alternatives such as property loan stocks and property unit trusts.

Similar REITs exist in some 25 countries, including the US, UK, Australia and Hong Kong, and local listed property companies are expected to begin converting to the REIT structure to take advantage of the tax benefits.

According to Estienne de Klerk, chairman of the new REIT committee and executive director at Growthpoint Properties, benefits for REIT structures include no entry tax and no capital gains tax on the profit from the sale of property owned by the company. All distributions to shareholders or linked unit holders are tax deductible.

Subsidiaries of REIT companies will also meet REIT status and enjoy the benefits by passing a 75% rental income test.

But what does this mean for the average investor?

Mr de Klerk said there was no securities tax applicable when acquiring REIT shares and distributions would be taxed at the marginal rate in your hands.

However, REIT distributions will not be included in any interest exemption — you are taxed from the first cent.

“REITs generally make distributions to investors twice a year and certain REITs pay quarterly. The investor’s return consists of two components — income returns from distributions and capital returns for the increase in the REITs’ share prices,” said Mr de Klerk.

Certain counters have delivered a total return of more than 50% in the past year (7% to 8% income and the balance in capital).

Globally, some REIT companies have underlying holdings in mortgages, but Mr de Klerk said that South African REITs were predominantly invested in commercial retail, office, industrial, hotel and hospital properties, as well as a few with a small exposure to residential property.

“There are not any REITs that invest in mortgages in the local market. With regard to the debt that the REITs have on the balance sheet, the interest rate risk is usually hedged with interest rate hedges, reducing the financial risk materially.”

Mr de Klerk said that most qualifying property companies could apply to the JSE to be listed from May 1 and the REIT dispensation did not prevent a secondary listing.

“But I think a dual listing could be complicated for a South African REIT because it has to be a South African-domiciled company or trust.”

He expects all the listed property loan stock companies and property unit trusts to be listed through the course of the year.

Once they are listed there, they will pop up on the screens of various international REIT indexes. In other words, a lot of foreign money could come piling in. The JSE’s REIT sector will be the eighth-largest in the world.

Source: FM

Last modified on Saturday, 18 May 2013 18:22

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