Amid rising uncertainty and the widening economic fallout of the Covid-19 pandemic, the South African Real Estate Investment Trust (SA Reit) Association has made an urgent request to the National Treasury to provisionally relax Reit tax rules in the country.
SA Reit chair Estienne de Klerk tells Moneyweb that a proposal on the matter was sent to Treasury on Monday.
This comes as the association, which represents the country’s multi-billion-rand listed property sector, looks at ways to mitigate the impact of the global coronavirus outbreak on the property industry. With thousands of businesses closed across the country, including most retailers in malls and city centre properties, Reits are facing the real prospect of tenants not paying rentals.
In terms of Reit tax laws that came into effect in 2013, JSE-listed property funds must pay out 75% of their taxable income to investors in order to be a Reit and benefit from not having to pay dividend taxes.
Until last year most property counters were paying out 100% of income through dividends to shareholders.
However, with South Africa’s economic woes bringing on a recession last year, several Reits have been reducing dividend payouts to strengthen their balance sheets.
Now, with Covid-19 exacerbating the country’s economic rut and the property industry facing its worst-ever conditions, SA Reit is asking Treasury for a two-year reprieve from paying out dividends.
The listed property sector has lost almost half of its value on the JSE since the beginning of the year.
Most of the sell-off has taken place over the past month with the increasing uncertainty around Covid-19, resulting in the majority of property funds withdrawing guidance on dividends for the year.
“We have approached regulators and the National Treasury for a reprieve for a two-year period to enable Reits to withhold their distributions,” De Klerk told industry stakeholders during a conference call meeting hosted by SA Reit jointly with the South African Property Owners Association (Sapoa) and the South African Council of Shopping Centres (SACSC) on Monday.
The meeting was called to address issues around the impact of Covid-19 on the property sector, retailers and other tenants. It included industry players, investors, listed property analysts and bankers.
“Sapoa, SA Reit and the SACSC are the three biggest organisations covering the country’s retail property sector. We have joined forces to form the South African Property Industry Group Covid-19 Initiative, which is aimed at responding to virus-related challenges facing the industry,” said De Klerk.
He pointed out that Treasury already has a “big workstream dealing with tax plans and regulatory issues” related to dealing with the Covid-19 situation.
Positive reform, limited period
“We believe SA Reit’s proposal is a positive reform for a limited period and will be the most efficient way of sustaining companies in the sector during these unpredictable times,” De Klerk added.
“The Reit sector is under tremendous pressure. There is a lot of uncertainty around the impact of Covid-19 and things are very fluid right now. We need to ensure the industry remains stable as we don’t know if the lockdown will go beyond 21 days.
“The [Moody’s credit rating] downgrade of South Africa does not help matters and will see local Reits also being downgraded in line with the country’s credit rating,” he said.
Speaking to Moneyweb on Tuesday, De Klerk explained that Reits are now in “an environment of liquidity constrains”, with challenges even around raising equity due to companies trading at significant discounts to net asset values.
Between a rock and a hard place
“The industry is between a rock and a hard place. We believe a two-year tax relief period, through the relaxation of the Tax Act around Reits needing to distribute most of their income, is a quick solution to the problem in very uncertain times,” he said.
“We hope the Treasury considers our Covid-19 concession proposal, which also needs to be accommodated by the JSE,” he added.
Keillen Ndlovu, head of listed property funds at Stanlib, described the move by SA Reit as positive.
“It makes sense given the risks that Reits, especially retail-focused funds, may not be able to collect rent due to uncertainties around Covid-19,” he said.
“Several listed property companies have already withdrawn their distribution guidance and are being forced to retain income to meet debt, interest and other requirements.”
With the SA Listed Property Index (Sapy) having plunged almost 50% year to date, Ndlovu points out that the Reit sector is the worst performing asset class again in 2020.
“The Sapy is down 48.2% in reaction to all the negative news. Discounts to net asset value now exceed 60% and historic yields are in excess of 19%. These numbers are so weak, reflecting that the market is very uncertain about the current valuations as well as the income,” he notes.
Ndlovu says the situation is fluid for the listed property industry and discussions are on-going.
“Property industry bodies are in discussion with banks regarding debt covenants; the Treasury and JSE regarding Reit regulations; and, retailers regarding rents in these really tough times. The biggest challenge is how long the lockdown will last and what the economic implications over and above the downgrade to junk status [will be],” he adds.
Anchor Stockbrokers’ head of research and property, Craig Smith, says SA Reit electing to engage Treasury to partially relax the tax dispensation around Reits is “pragmatic” and a “proactive” step.
“Reits do need leeway to manage their balance sheets and liquidity, especially under current market conditions… Numerous businesses need tax relief in view of the impact of Covid-19, so it remains to be seen whether the Treasury will offer some respite for the Reit sector,” he notes.
“The sector plays a key role in the economy, hence offering the industry some latitude is sensible. The Treasury could offer the sector a tax reprieve, and perhaps claw back the money once the sector is on a better footing. Such measures will limit the impact of the virus not only for property companies, but many of their tenants too,” adds Smith.