Face-lift for listed property?

Foreign investment in listed properties is minimal and the sector needs to adopt the Real Estate Investment Trust (REIT) structure to become a global player and attract offshore investors.

“If you want to play with the big boys, you have to look like us,” said Chicago-based Sam Zell, chairman and founder of the world’s largest REIT, speaking at the two-day REITs conference, organised by the Property Loan Stock Association (PLSA).

He said foreign investors need a globally-recognisable security and would not listen to a long schpiel defining quaint local terms such as property loan stocks (PLSs) and property unit trust (PUTs).

Through a REIT structure, a company invests in property and receives special tax considerations. To qualify as a REIT, a company must distribute at least 90% of its taxable income to its shareholders annually. It is permitted to deduct distributions paid to its shareholders from its corporate taxable income. In some cases, REITs that distribute all of its taxable income will pay no corporate tax.

REITs originated in the United States in the 1960s and today, the sector is worth $370bn. The structure has been adopted in Canada, Singapore, France, Australia and The Netherlands.

Mike Flax, CEO of Spearhead, explained that only 3% of listed property stock is in the hands of foreign investors and reckoned it could be as high as 20%.

Leon Allison, property analyst at First South Securities reckoned that if one of the focuses of the South African listed property is – as it should be – attracting international investors, then it is vital to have a standardised structure and the most appropriate vehicle is the REIT.

“While the current listed property structures, PLSs and PUTs, are not dissimilar to the REIT, conversion to this standard vehicle has clear benefits, certainly in terms of tax,” he added.

PLSA members support the re-positioning of the listed property sector towards a REIT environment and are leading the change process.

They note that many similarities exist between the current structure and REITs, which is why it is feasible for the property sector to adopt the international standard.

Flax reckoned the listed property sector had kept its head in the sand for too long and it was time to adopt an international standard.

“We are never going to be a global player if we don’t adopt REITs,” he added.

Source: Moneyweb - www.moneyweb.co.za

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