The listed property sector is expected to get a shot in the arm next year from foreign investors because of the conversion of companies to a retail estate investment trust (Reit) structure. However, this was also expected to lead to greater volatility in the sector.
Estienne de Klerk, the chairman of the Reit committee of the Property Loan Stock Association (PLSA), said yesterday that it was impossible to estimate the level of foreign investor capital flows into the sector but they were acutely aware that certain international investor funds only had mandates to acquire Reit stocks and could not currently acquire locally-listed property stocks.
The publication of the Taxation Laws Amendment Bill last month made provision of the conversion of listed property companies to Reit.
Parts of the bill came into effect immediately while others apply only after Reit conversion. From April 1 next year, any qualifying company with a tax year starting on April 1 or after can adopt the new South African Reit structure at the start of its tax year.
De Klerk said South Africa would likely become the eighth-largest Reit market globally if all JSE-listed property companies elected to adopt it.
Leon Allison, an analyst at Macquarie First South Securities Research, said South Africa’s weighting within global Reit indices could potentially quadruple and South Africa’s largest Reit-like company, Growthpoint Properties, could become the largest emerging market Reit and the 40th largest Reit globally.
The PLSA, which represents South Africa’s listed property sector, has since 2006 been driving the process to get Reit legislation passed in South Africa.
US property tycoon Sam Zell, the founder of the Equity Office Properties Trust and Equity Residential, told a local conference in 2006 the focus in South Africa should be on creating a uniform structure that made understanding property equal to anywhere else in the world. “If you want to play with the big boys, you’ve got to look like us,” he stressed.
De Klerk said there were still a few essentials to wrap up to prepare for Reit in South Africa and the PLSA was working closely with the JSE to complete the listings requirements for Reit and compiling best practice accounting disclosure and reporting standards.
“This will not only improve disclosure in the sector but make it easier for accurate comparison of different South African Reit companies.”
Anton de Goede, a property analyst at Coronation, said the conversion of listed property companies to Reit would make them more attractive to foreign investors, adding that any increased demand from international investors could lead to an higher property stock prices.
But De Goede believed local investors would still be the main driver of Reit prices while the increased presence of foreign investors was likely to lead to increased volatility.
De Klerk said there would be increased demand for South African Reits if they ended up on global Reit indices because international track funds would buy into the Reits, which might lead to a rise in the stock prices.
However, De Klerk said foreign investors had to date been paid interest, which they repatriated tax free, but from 2014 distributions to foreign investors would be subject to a dividend withholding tax at a maximum rate of 15 percent.
De Klerk said the discussions started by the PLSA with the Treasury for a listed property sector would be continued by the SA Property Owners’ Association Reit committee for unlisted, institutional and other property loan stock companies.