National Treasury's REIT discussion paper, released earlier this month for public comment, has set the wheels in motion for property unit trusts (PUTs) and property loan stock companies (PLSs) to convert to a single investment vehicle during the course of 2009. That follows the worldwide shift to a REIT environment, which has seen a number of countries convert to a uniform REIT structure in recent years.

South Africa's PUT and PLS structures differ in various ways, which many believe create unnecessary confusion for investors. For example, PUTs are governed by the Collective Investment Schemes Act while PLSs fall under the Companies Act, leading to an inconsistent tax treatment. There's also the issue of PUTs being overregulated and PLSs perhaps underregulated. Until recently, PUTs were restricted to gearing of 30% while PLSs have no restrictions in that regard. Another key difference is the way that the funds are managed.

Treasury says the aim is to establish a new structure for property stocks that's "straightforward, well understood, internationally competitive and easily accessible by local and foreign investors". Industry players have welcomed most of the proposals, although there seem to be some areas that need further clarity.

Nedcor Securities property analyst Evan Robins says the key issue - particularly for PLSs - is that the discussion paper removes the cloud of tax risk, as REITs would be definitively tax neutral. Another positive is that Treasury's proposals could see PUTs being forced to give voting rights to shareholders. Robins says greater investor control could lead to a rerating of PUTs, as they may have more corporate action possibilities. He says Fountainhead and Sycom have the most upside in that regard.

Robins says PLSs may start making a serious play for PUTs once the new legislation is in place - something currently difficult to do due to the way PUTs are controlled and managed.
 
A key proposal that could affect investors over the short term is Treasury's plan to put an end to the practice by some funds to pay out trading profits as distributions to shareholders. Funds that have done so recently include Redefine, Acucap, ApexHi, Hyprop, Octodec and the Pangbourne Group.

Robins says Treasury's decision on that front could see some funds deciding to realise trading profits while they still can, leading to a flurry of final trading profits being paid out in 2008 before the REIT structure is adopted. That could inflate 2008 distributions but could also create a base off which it may be difficult to grow payouts over the following year.
In addition, Treasury proposes that the proceeds of property sales must be reinvested within 12 months and property developments kept for three years to discourage speculative investment. Robins says some funds could choose not to convert to the REIT structure or divest those projects because of such requirements.
 
James Templeton, CEO of listed PUT Emira and chairman of the Association of Property Unit Trusts (Aput), says the association is extremely encouraged by the contents of the discussion paper. However, one key area of uncertainty is whether Treasury will impose a one-off conversion tax or fee.

More detail is also needed on how (if at all) the management structure of PUTs will change once new legislation is implemented. Templeton says it's not clear from the discussion paper whether PUTs will have to allow for shareholder participation. If not, this could have a material impact on the way forward for PUTs, particularly in terms of mergers, takeovers and other forms of corporate action.

* Aput and the Property Loan Stock Association will prepare their respective responses to the REIT discussion paper in January next year. Treasury's deadline for public comment is 31 January 2008. The paper can be downloaded from www.treasury.gov.za; alternatively it is attached to this article for download.