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SA Reits want tax relief from Covid-19 fallout

Listed property sector worst-hit asset class as lockdown takes its toll, with retail tenants saying they cannot pay rent.
SA Reit Association chair Estienne de Klerk says the industry body has asked Treasury for a two-year reprieve from paying out dividends. Image: Supplied

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.


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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.

Reprieve sought

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.

Asset Class Total Returns to 31 March 2020. Source: Anchor Stockbrokers

Read: Covid-19: Major mall owners hammered on the JSE

“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.

United front

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.

Read: SA Reit sector worst performing asset class again in 2019

“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.

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Two years! Two years based on what? The lockdown is for 21 days, and with good effort the virus should be tracked down and squashed. If SA keeps its borders controlled and does not go and invited ‘tourist’ regardless, then it should be fine and the economy will return to the malls. There is real pent up demand out there with people ‘locked up’, so what I want to know is how do 21 days suddenly equate to 720 days of REITS avoiding to comply with the very foundation of why they exist in terms of the law? What justifies two years? What will stop them from asking for 5 or 10 years? What do people who have bought these shares for income purposes supposed to do? Am I to expect that in the meantime the Treasury will be sending me the difference? The request for reprieve is reasonable for reprieve, but two years duration is ridiculous. The government should reject this request until a sensible request is resubmitted. And to shareholders get to vote on this?

Consider for a moment there is a possibility that you may be underestimating the effect this shutdown will have on the economy.

The REIT model has been called in to question before. Having to pay out 75% of taxable income leads them to using debt to fund growth (and probably upgrades and maintenance). With debt now getting expensive and the ability to raise funds via equity not an option, they want to be able to retain a higher portions of their taxable income. Perhaps it is time to scrap the REIT model? If it cannot survive a period of financial stress, it is probably not a good construct.

What has not been discussed is the effect of administered prices. The REITS should stop paying rates, taxes, electricity, water and encourage the public sector to take a 50% pay cut.

The tax scheme for REIT never made sense just like private equity interest deductions never made sense. Tax property companies and their dividends like any other company.

“The “private” sector should be saved, in part, by cutting salaries of public servants by 50%” , said no one who believes in free markets.

As per this article
REITs were never sustainable as the 75% dividend made them unable to repay any of their debt. All these years they have been piling up debt and driving up property prices.
The chickens are coming home to roost

Debt now getting expensive? Interest rates have just been reduced by an unprecedented 1% .Not since post the Asian crisis(1998) have interest rates be reduced by such a large amount.

“IzzThatSo”…No worries. South African govt will be pleased to know that. Cost of debt is related to risk.

Des de Beer from Resilient is one of the wealthiest people in the country and so are many others at the other REITs. I am not so sure that the government is going to feel sorry for them (but I suppose that is for the government to decide).

Nah. The GEPF and their pensioners are the biggest beneficiaries of property funds

The truth is that the entity that listed its shares should not worry about what happens to the share price once they sold the shares in the first place AND GOT THEIR MONEY.

The share is now firmly in the after market.

But no. What does the REIT and management do? The dabble in the share even when it is in the after market by issuing shares as incentives or worse, buying back shares. Etc

The shares in the REIT sector were already 50% down due to factors like being in a recession and their being too much space built and the Reits had overvalued their assets massively.

Also we are told that due to the same factors certain Reits are cash flush, like L2D and others have gone big in places like Spain and Eastern European jurisdictions.

Now they want to change the game. Why not just pay out the cash held as dividends?

Next they will want to socialize any losses.

the hired help at the property companies have an NAV problem of their own making. They pushed valuations to the extreme to push their bonuses.

Upward valuations are journal entries – no wealth is created anywhere. Bonuses on the other hand are very real.

Now imagine the new round of valuations : higher vacancy, lower renewals, higher cap rate. 25% haircut on valuations is overdue.

Best bail out the business that was closed down so they can pay rent.

Then these sharks have nothing to moan about and can pay tax as normal.

Thousands of pensioners also depend on the distributions. Who will bail them out.


Keillen Ndlovu is conflicted as a commentator.

No ways!! No, no, no!! I hope Treasury throws this proposal out the window!! So many investors depend on that income for their livelihoods!! Two years? Seriously two years??? This is absurd.

Equity risk means that income or values are not guaranteed. Regardless of this proposal, income to investors from REITS is going to decline significantly. Share prices are telling you that.

An investor that depends on Reits for their income perhaps may not have diversified enough? If I understand it correctly it is important to diversify ones investments somewhat.

Not according to Warren.

Good time to scrap the nonsense that is section 28 !!!

The arrogance.

If I’m bad at my job I can’t get tax relief.

Why should they?

Did the government tell you to stop working(not because you are bad at your job)?

Heads I win, tail you loose.

Nice, creative property gangs working capitalism to socialize their downside

3 weeks out of 52? Even if it turns out to be 6 weeks. Can’t these guys do the maths? This industry never did attract the sharpest tools in the shed.

End of comments.





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