Real Estate Investor Magazine South Africa May 2013 | Page 42

LISTED

BY IAN ANDERSON

REIT Legislation
Increase your growth and income

S

outh Africa’s listed propert y sector
gained a further 3.3% in March and,
at the time of writing in April, it is up
9.1% since the start of the year. The sector has
significantly outperformed both the equity
and bond markets since June 2012 and some
of this outperformance is probably due to the
introduction of Real Estate Investment Trust
(“REIT’) legislation in South Africa.
REITs were first introduced in the United
States during the 1960s as a means of giving
the man in the street access to the benefits of
commercial and industrial property. During
the first 30 years, banks and other institutional
investors exploited the legislation as a means
of off loading underperforming properties
to unsuspecting investors or to create highly
leveraged and risky property investments, which
once again were sold to unsuspecting investors.
The savings and loans crisis of the late 1980s
and early 1990s resulted in the failure of many
of the first or second generation REITs and
led to the start of the modern REIT era. The
most significant difference between the first
REITs and modern REITs is the behaviour of
management. The first REITs were externally
managed, passive investment portfolios that
attracted very little capital over the 30 years.
I n c ont r a s t , t he mo der n R E I Ts a re
internally managed, with entrepreneurial
management teams engaged in the
development, redevelopment, management
and sale of portfolio assets. The evolution
from passive portfolios to vertically integrated,
entrepreneurial real estate operating companies

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May 2013 SA Real Estate Investor

led to a significant increase in both income
growth and total returns for investors.
A lthough Nationa l Treasur y forma l ly
published REIT tax legislation for South Africa
on 25 October 2012 and the JSE published new
listing requirements that will facilitate the
REIT structure in South Africa on 28 March
2013, South Africa’s listed property sector has
been operating with REIT-like characteristics
since the late 1980s.
The early South African listed property
companies were externally managed and
promoted by some of the country’s largest
institutions. The sector attracted very little
investor interest and the overall quality of
the property portfolios was not particularly
good. From the late 1990s, the sector began
to adopt many of the best traits of foreign
REITs and today the sector is dominated by
vertically integrated, entrepreneurial real
estate operating companies.

the sector is now capable of producing income
growth in excess of South African consumer
inflation in the years ahead.
So despite the absence of off icial REIT
legislation, South Africa’s listed property
companies have been operating like the very
best global REITs. Unfortunately, without
REIT legislation, the tax status of South
Africa’s property loan stock companies (the
capital structure and vehicle of choice for some
of the largest listed property companies in
South Africa) was never certain.
With the tax certainty that South Africa’s
REITs will enjoy from 1 May 2013, foreign
investor interest in the sector is likely to
increase. A number of companies have already
reported a substantial increase in their foreign
shareholdings and this trend is likely to
continue as more and more companies will
make application to the JSE to become a REIT.

This resulted in increased investor appetite
and significant growth in the size of the sector.
From a market capitalisation of R5 billion in
1998, the sector has grown to more than R200
billion today. Growthpoint Properties, the
largest South African listed property company,
is a constituent of the FTSE/JSE Top 40 Index.

From an investor’s standpoint, the experience
w il l be no different going for ward. As
mentioned earlier, most of South Africa’s listed
property companies are already REITs in all
but name. Th e only difference is that investors
will now have more certainty regarding the tax
status of their listed property investments.

With a significant increase in capital and
a reduction in the cost of that capital, South
Africa’s listed property companies have been
able to acquire, develop and redevelop some
of the very best shopping centres, offices and
distribution centres in the country. At the same
time, income growth rates have accelerated and

It is expected that within a year, there will
be approximately 30 South African REITs
offering investors the benef its of a ta xadvantaged investment in some of the country’s
best commercial and industrial real estate.

RESOURCES

Grindrod Asset Management
www.reimag.co.za