It has been a busy three years since property companies adopted the globally recognised Real estate investment trusts (Reits) dispensation – with the sector opening up more to foreign investments.
The sector’s conversion to the Reit structure from the previous property unit trust and property loan stocks – which were viewed to be thin on regulation from the JSE – has transformed the local sector.
Not only has the dispensation, which has been eight years in the making, brought local property counters in line with global tax standards – but more offshore fund managers and property punters have been betting on SA’s property market.
But this has not been to the scale expected. Chairman of the SA Reit Association Laurence Rapp says foreign investors have an appetite for funds with bigger size and liquidity. A typical fund will have a market capitalisation of US$1 billion (R15.2 billion).
“The Reit dispensation hasn’t brought benefit for the whole sector in terms of foreign investments. Foreign investors have been investing largely in bigger and top funds,” Rapp told Moneyweb on the sidelines of the SA Reit Conference 2016 on Thursday.
It is calculated that foreigners own up to 20% of SA’s listed property sector.
Latest figures show that about 36% of the FTSE/JSE South African property index is exposed to foreign currency earnings whereas the sector had no foreign exposure ten years ago.
Listed Reits have become bigger than retail and healthcare shares since the dispensation. Recent figures from the SA Reit Association suggest that Reits account for 5.8% of the FTSE/JSE All Share Index while retail and healthcare shares account for 5.7% and 3.9% respectively.
Of the 54-odd property companies on the JSE’s real estate sector, about 20 property counters are not listed as a Reit, according to the JSE. The market capitalisation of the sector stands at more than R400 billion, with Reits representing R330 billion. “Property was seen as a stepchild on the JSE and people didn’t understand it. However, Reits have been a significant part of the JSE,” says Rapp.
Not only has the sector seen international investors hitching their wagons on the SA market, but local property counters have been bullish in offshore markets. SA’s worrying economy, depreciating rand and policy uncertainty are some of the factors prompting property counters to look for growth in offshore markets.
Some SA-focused counters which have made offshore investments in recent months include: Vukile Property Fund and Texton Property Fund, which invested in the UK; Tower Property Fund, which recently invested in Croatia, Redefine Properties, Attacq Limited and Hyprop Investments, which all recently made a foray into Europe.
With the Reit dispensation bringing SA’s tax regime in line with global standards, this also provided more regulation for property companies. Deputy CEO of the SA Institute of Tax Practitioners Keith Engel says the move away from property loan stocks and property unit trusts made listed property companies more transparent.
“The Reit regime makes property a liquid and transparent asset and gives investors a safe asset class,” says Engel.
Investors are guaranteed distributions (or dividend payouts) as companies are compelled to distribute more than 65% of their rental income on properties to shareholders.
“Property loan stocks and property unit trusts were working but now the sector is more formalised and more people are investing in property,” says Engel.
There is still greater scope to get more unlisted property-owning vehicles to a Reit status, but not only regulated by the JSE but the Financial Services Board as well. Unlisted property-owning vehicles include pension and life insurance funds, private investment vehicles and property syndications.
Former Minister of Finance Nhlanhla Nene in his 2015 budget speech noted that that National Treasury was working towards extending the Reit dispensation to unlisted property-owning companies. Industry players say this would level the playing fields. But since then, this has not come to fruition.