THE Association of Property Unit Trusts, which represents the six property unit trusts listed on the JSE, believes a modification of the existing property unit structure may be the route to take in adopting the real estate investment trusts (Reits) structure in SA.
The association’s deputy chairman and MD of listed property unit trust Martprop, Roger Perkin, said a modified property unit trust structure should be found for both existing listed property unit trusts and property loan stock companies.
Perkin said the most important reason for exploring a modified property unit trust structure is that property unit trusts — like Reits — already have a tax dispensation whereby income flows directly into the hands of unitholders without being taxed at the corporate level.
“We do not have any tax issues and the tax-transparent form of property unit trusts is already legislated.
“It is not necessary to go back to national treasury and ask to change them, which would be the case if the property loan stocks wanted to adopt a Reit form,” he said. Perkin said that property loan stock companies were subject to tax.
Investment trusts were the subject of a conference hosted by the Property Loan Stock Association in Sandton last week to garner support for the adoption of the Reits structure in SA.
The leading Reits market is the US, with a $478bn market capitalisation and 159 listed investment trusts. Listed property companies in Europe have adopted the structure and the UK will introduce it next year.
The Property Loan Stock Association, which represents 25 JSE-listed property loan stock companies, said it realised that if the listed property sector is to become recognisable to international investors, it has to take on an identity in line with international trends and standards.
SA is one of the few countries with a listed property sector that has not adopted the structure.
The association believes that investment trusts combine the best of property unit trusts and property loan stock companies.
A Reit has unlimited borrowing capacity, as does a local property loan stock company. A property unit trust can borrow only 30% of total assets. Like a property unit trust, a Reit does not pay capital gains tax, whereas a property loan stock firm does.
Investment Trusts, like a property loan stock firm, can invest in a listed property company. A property unit trust may not.
The association believes a property unit trust and property loan stock company could be converted to a Reit.
Mike Flax, CEO of listed property loan stock company Spearhead, who was speaking at last week’s conference, said the property loan stock structure in SA could have tax implications for listed property companies.
He said the adoption of the globally accepted Reits structure would remove capital gains and revenue tax from these companies and pass the tax burden on to their unitholders.
At the moment the provisions of property loan stock companies for capital gains tax run into billions of rands.
Another pressing issue is the possible restriction on interest deductions by the South African Revenue Service. (SARS)
Property loan stocks have linked units, each consisting of a debenture and a share.
Flax said the way property loan stock companies pay out profits is to “clear them out as interest on the debenture portion of the unit”.
He said that profits have risen to such a degree that the interest rate on the debentures have risen to a level that may be unacceptable to SARS.
There is a moratorium on SARS disallowing a portion of the interest for tax deduction, pending final agreement on a new structure for the property loan stock companies.
Perkin said both property loan stock companies and property unit trusts should “see if we can find the Reit solution in a modified property unit trust structure which would meet everybody’s needs”.
“The first thing we would have to address would be the issue around the limitations on borrowings for property unit trusts,” he said.
Perkin said the Association of Property Unit Trusts would like to raise the borrowing level from 30% to 50%-55% of total assets.
He said property unit trusts in the sector would be “quite happy” to call the new modified structure a Reit.
Perkins South African property unit trusts are allowed to hold listed property shares offshore. “This makes property loan stocks more flexible than … property unit trusts. Those are the two major concerns.”
