REITs structure to stimulate Hotel Investments

Stanlib Direct Property Investments chief investment officer, Amelia Beattie says REITs structure is likely to "aid the hotel industry" and Stanlib is targeting about 7.5% exposure to hotel investments in a balanced portfolio.

The newly launched real estate investment trusts (Reits) structure in South Africa and the mobilisation of sovereign wealth funds for investment in Africa are likely to stimulate hotel investments on the continent, the Hotels Investment Conference Africa heard last week.

The Reit regime, a feature in many developed stock markets, has already been welcomed by the listed property sector, and is expected also to bring greater clarity and certainty to individual unitholders.

The legislation ensures more consistent tax treatment for property loan stocks and property unit trusts, and consistency with international norms, and removes the capital gains tax (CGT) when properties are sold.

The more simplified tax treatment is anticipated to encourage foreign investment. The chief investment officer of Stanlib’s Direct Property Investments franchise, Amelia Beattie, said at the conference in Durban on Friday that Reits are likely to "aid the hotel industry".

Ms Beattie says Stanlib is targeting about 7.5% exposure to hotel investments in a balanced portfolio.

While 75% of a Reit’s income must be derived from rental flows, the net income derived from immovable property, "the definition of rental flows includes anything to do with the use of immovable property — so where there are management contracts in place, or leases on hotels, we believe that income will flow through that 75% rental definition".

The structure would likely make investors feel "more comfortable in investing in hotels".

"From a tax point of view, the main benefit is that there’s no CGT on sales of underlying properties, and that the gross distribution will be taxable at the shareholder’s specific rate.

"It’s good for the industry and it’s good for South Africa as an investment destination". The structure is likely to attract global capital as it drives "prudent management", and provides "transparency and governance that international investors are used to", she says.

The legislation is progressing well in Kenya, and once implemented it is likely to "spill over" into other countries.

Gabriel Matar, regional director of hotels and hospitality for the Middle East and Africa at Jones Lang LaSalle, says a hotel transaction in Johannesburg, involving Middle Eastern and Asian capital, is "a good indication" of growing interest from investors in investing in the African market. There is a direct link between where transactions are happening and "the transparency index of each market". Foreign investors need more transparency than local investors, Mr Matar says.

There is "some evidence of capital coming to Africa — quite shy for now but it is a good start, and we believe that it’s likely to increase in the coming few years, slowly but surely".

Actions such as those taken in South Africa with the implementation of the Reit structure would facilitate the growth in foreign capital, Mr Matar says. He says there are also sovereign wealth funds, particularly from the Middle East, which are mobilising and looking at hotel investment opportunities in Africa.

While they had not yet engaged in any transactions, "I suspect that they are likely to do so in the coming 18 months".

One regional African sovereign fund is targeting sub-Saharan Africa, specifically urban hotels. The fund is entering the market with a sophisticated operating company, Mr Matar says.

Typically, the real estate exposure of sovereign wealth funds is between 7% and 10% of their portfolios, which "could be several hundred billions worth for the biggest funds".

Ms Beattie says while many sovereign wealth funds are keen on hotel investments on the continent, challenges exist such as that in the Middle East, funds need sharia law compliance.