"The internationally-recognised REIT structure exists in countries such as the US, Australia, Belgium, France, Hong Kong, Japan, Singapore and the UK," explains Estienne de Klerk, REIT committee chair of the Property Loan Stock Association (PLSA), which is spearheading the South African initiative to establish a best-of-breed REIT vehicle. "Introducing the REIT structure will bring South African listed property investment in line with international norms."
Over the past 10 years, listed property has become the most active sector on the JSE in terms of new listings, mergers and acquisitions. It has shown resilience and relevance. It has also grown, matured and volunteered an extremely high level of stakeholder transparency.
Presently the listed property sector comprises five property unit trusts (PUT), but about 20 property loan stocks (PLS), the largest of which are major counters on the JSE - Growthpoint Properties, Redefine Properties and Hyprop Investments. These numbers reflect the industry's preference for the PLS structure. PLS have also been responsible for the sector's growth and represent its most thriving counters.
Neither of the current structures - PLS or PUT - offers the uniformity and simplicity to facilitate international investment. In addition, there has been some potential for tax uncertainty, which is in itself enough to deter some international investors.
"The REIT structure typically provides for the flow-through of net rental to the investor, after expenses and interest. This income is ultimately taxed in investors' hands, as is normal," says de Klerk.
REIT legislation discussions were initially slow because of the various industry complexities and a number of immediate issues facing National Treasury, highlighted by the global financial crisis.
However, the April 2011 tax legislation amendment bill raised the priority of REIT legislation, particularly the proposed Section 8G which deals with debentures with no specified termination date.
"Had it not been willingly suspended by national treasury, this section would have resulted in the debenture interest distributed out of PLS companies being taxed as a dividend. This would have destroyed significant value in the listed property sector."
The proposed amendment was never intended to have a negative effect on the sector and was, in fact, designed to prevent tax leakage in other structured finance transactions. National treasury suspended Section 8G until the successful completion of REIT legislation, which it has stated is a priority and is intended for finalisation by the end of 2012 or early 2013.
De Klerk reports that considerable progress is being achieved with the potential proposed REIT regulations, as well as seeking an appropriate regulatory framework and efficient REIT structure for South Africa. "National treasury has committed a vast deal of time to understanding the listed property industry and defining areas to benefit from regulation and excluding those that won't."
The sector, through the PLSA, Association of Property Unit Trusts (APUT) and appointed REITs advisors, has had various productive meetings with the national treasury tax policy unit, the JSE and Financial Services Board. In December 2011, national treasury met with UK and European experts including representatives of the European Public Real Estate Association (EPRA), and a KPMG experienced UK revenue services specialist to learn about best-of-breed practices in the UK and globally.
It is expected that internally- and externally-managed REITs will be included in the legislation. De Klerk points out that while providing flexibility in management structure, the worldwide trend is for investors to favour an internally managed company, however local REIT factors are considered.
"We anticipate a governance framework consistent with modern best practice. Investors should be able to vote on large transactions and appoint or remove those vested with management power." He further points out that additional governance protection results from being listed on the JSE, ensuring the transparent, effective, professional management essential to protect investors.
The new legislation should also give companies currently in the listed sector the opportunity to access the new SA REIT structure, with no entry charge. This structure should also deal with the unique variations and competitive differences of the sector's component companies, without stifling operational efficiency or having unintended consequences and inhibiting the ability to respond appropriately to changing circumstances and conditions.
"The new SA REIT structure should provide tax certainty and efficiency relating to distributions. It should also cure anomalies in the availability of tax deferral or roll-over relief for mergers and acquisitions," concludes de Klerk.
A single unified umbrella body for listed property in SA is also expected to emerge in the near future with the PLSA and APUT merging.
