Reit adoption set to boost investment at home and abroad

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South African listed property is gaining popularity at home and abroad, thanks to its adoption of internationally recognised Real Estate Investment Trust (Reit) structure, a panel discussion at the SAPOA Convention said. South African listed property is gaining popularity at home and abroad, thanks to its adoption of internationally recognised Real Estate Investment Trust (Reit) structure, a panel discussion at the SAPOA Convention said.

South African listed property is gaining popularity at home and abroad, thanks to its adoption of internationally recognised Real Estate Investment Trust (Reit) structure for financial regulation and tax dispensation.

The SA REIT structure officially became effective last year in May. Both types of listed property investment entities in South Africa – property loan stocks companies (PLSs) and property unit trusts (PUTs) – where given a chance to convert to a regulatory framework set out by the JSE.

At the annual 46th SAPOA convention which was held in Cape Town from 10-12 June, a panel discussion titled ‘Real Estate Investment Trusts (REITs)’, echoed same views that the status brought the listed sector in-line with the latest international standards and meant foreigners would consider buying South African property stocks.

The panel included the likes of Prof Brian Kantor: Non-executive Chairman of Acucap, Nesi Chetty: Fund Manager & Head of Property, Momentum Asset Management, Laurence Rapp: CEO at Vukile Property Fund, Rüdiger Naumann: Portfolio Manager at Investec Asset Management and Werner Opperman: Research Manager at RisCura Consulting.

Outgoing Sapoa President, Estienne de Klerk said the sector had recently attained Real Estate Investment Trust (Reit) status.

The status relates to universal tax dispensation and would exempt REITs from capital gains tax (CGT), which had been a contentious issue for some time. Property loan stocks used to pay capital gains tax on property sales and were in effect double taxed.

Growthpoint Properties is a JSE Top 40 company. Redefine Properties is a company which could shift to Top 40 status. Growthpoint has a market capitalisation of close to R55bn up from R30m when it listed in 2002. Its conversion to Reit status has made it the 40th biggest Reit in the world.

Hyprop Investments, a specialised retail property fund, is also on the foreign radar.

Professor Brian Kantor, the non-executive chairman of Acucap Properties, said Reits status would attract investors to a sector that had already outperformed equities and bonds over the past decade.

"Listed property is an excellent investment in SA as it still has legs. Pension funds should invest more deeply. Property is not seen as equity so the funds can invest beyond their equity weighting in a portfolio," he said.

Vukile Property Fund CEO and newly appointed South African Reit Association chairman, Laurence Rapp, said the biggest challenge to the listed property sector was gaining size and liquidity.

Considering the sector was only a few companies about 12 years ago and over 30 now, it had grown fairly quickly but needed more general investors to take an interest.

Nesi Chetty, Fund Manager & Head of Property at Momentum Asset Management, said foreign investors were net sellers of local property stocks in the fourth quarter of last year. "Increased concerns regarding potential interest rate increases in the US no doubt prompted a reallocation of funds into traditional, safer asset classes."

Though this trend has reversed somewhat in the second quarter of this year, with foreigners slowly starting to buy SA Reits again, Chetty says less than 10% of the SA property sector is in foreign hands, which is low compared to the 30% foreign ownership of SA bonds. "Though our sector offers attractive yields of more than 7% on average relative to developed markets at below 5%, we still have a long way to go before foreigners will aggressively pursue our Reits."

SA's listed property sector has a market capitalisation of around R250bn and ranks 8th in the top 10 Reit markets globally. It was worth about only R5bn in 2002, 12 years ago.

The average total return for listed property this year to date is around 7.7 percent better than consumer price inflation of 6.6 percent.

Various companies are expected to list or merge because of the lower costs of doing so following the Reit company structure.

Consolidation has become a major theme of the sector in recent months. After a listings boom over the last few years, many of the smaller REITs that came to market have found funding hard to come by and growth difficult.

Apart from the recent Redefine Properties and Annuity Properties merger, the latest consolidation comes from the sister companies Premium Properties and Octodec Investments which has been described as a coming together of two companies with the same strategy.

Acucap and Sycom’s merger is in the works, while Redefine and Fountainhead merger is also on the cards.

There are expected to be a number of new listings and mergers in the sector during the rest of 2014 on the back of the demand for retail options for consumers but also because companies are finding opportunities in other property sub classes including residential.

There is a large demand for affordable and student housing which is one driver of this and also for housing in Gauteng for its growing working population.

The latest listing on the JSE is Equites Property Fund which became the fifth property company to list this year. Its listing came shortly after the JSE entry of Freedom Property Fund, Visual International Holdings, Safari Investments and Atlantic Leaf Properties.

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Listed Property / REITs  |  SAPOA Convention and Property Exhibition  |  Brian Kantor  |  Estienne de Klerk  |  Laurence Rapp  |  Real Estate Investment Trusts (REITs)  |  Nesi Chetty  |  Rüdiger Naumann  |  Werner Opperman