THE South African listed property sector, which consists of property unit trusts and property loan stock companies, has increased its market capitalisation dramatically over the past five years, and looks set to start attracting international investors. From an insignificant sector on the JSE with a market capitalisation of only R5bn in early 2000, it has increased its market capitalisation to about R70bn.
With this growth has come increased liquidity while massive returns have boosted the image of the sector within SA and abroad.
But leading property players and commentators believe property companies and funds should consider adopting the globally recognised real estate investment trusts (REITS) structure to woo foreign investors.
One of the most vocal proponents of the REITS structure is the Property Loan Stock Association, which represents 25 South African listed property loan stock companies.
The leading REITS market is the US with a $478bn market capitalisation and 159 listed REITS.
Listed property companies in Europe have also adopted the structure, and the UK is set to introduce the structure next year.
Brian Azizollahoff, CEO of listed property loan stock company Redefine Income Fund and chairman of the marketing subcommittee of the Property Loan Stock Association, says the association has recognised that if the listed property sector is to become recognisable to international investors, it has to take on the “identity in line with international trends and standards”.
Azizollahoff says SA is one of the last countries in the world with a listed property sector that has not adopted the REITS structure. “We’ve embarked on the process,” Azizollahoff says.
REITS combine the “best” of both the property unit trusts and property loan stock companies, he says. A REIT has an unlimited borrowing capacity, as does a South African property loan stock company, whereas a property unit trust can borrow only up to 30% of total assets.
Like a property unit trust, a REIT does not pay capital gains tax whereas a property loan stock company does.
Azizollahoff says a REIT, like a property loan stock company, can also invest in another listed property company, whereas by law a property unit trust may not.
“ REITS generally have to distribute a minimum of 90% of income, but most distribute 100%. Property loan stock companies and property unit trusts both do the same.”
Azizollahoff says a property unit trust and property loan stock company could easily be converted to a REIT.
“We would like to see a situation where an investor in the US or Singapore, interested in investing in a developing market, would be able to understand the structure of the South African sector,” he says.
The South African listed property sector is still relatively tiny compared to the US, for instance.
“We’ve had visits from US REIT investors and analysts who have expressed interest,” he says.
“If we can put this REIT structure in place, and build up critical mass within the sector, we should be a very attractive market for the overseas market. SA’s economy is stable, and the interest rate and inflationary environment is stable.”
Ian Anderson, investment director at The Income Specialists, says international investment into the South African listed property sector will be encouraged by the emergence in recent years of several global property indices on which large South African companies such as Growthpoint, Grayprop, Hyprop and Sycom are represented.
Norbert Sasse, chairman of the Property Loan Stock Association and CEO Growthpoint, says the Property Loan Stock Association will host a REITS conference, sponsored by Investec, on August 16 and 17.
