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South African REITs: 2 Years
Onward
SA-REITs Association
22 October 2014
Economic Fundamentals
Page 2
Property as a Recognised Asset Class
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Listed financial instruments
(recognised)
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Property:
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REITs (recognised)
Unlisted property vehicles
Hedge Funds (recognised)
Infrastructure projects
Private Equity
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Debt
Shares
Large
Venture capital (recognised)
Property Types
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Retail
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Office
Industrial
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Logistics
Light industrial
Other
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Full malls
Strip malls
Hotels (very few)
Residential (low yield)
Power stations (not yet)
Healthcare (not yet)
Retirement (not yet)
Mortgage REITs
REIT Investor Objectives (Yield and Growth Mix)
Distributions
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Historic
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New REITs (JSE)
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Dual-linked units
Legal contractual right to annual
distributions
Typically 95%+ of profits
Shares
75% minimum distribution requirement
Typically 95%+ of profits
Yield (amount versus sustainability)
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Net Asset Value (Upon Exit)
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Method
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Sale to other investors
No required redemptions
Basis for growth
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Management
Property selection
Developmental Property Investments
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Institutional
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70/30
Annual yield subsidises development
Stand-alone
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Build or improve
Goals
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Future annual yield
Reinvest
Cash-out
Not suitable for forced annual payouts
Economic Climate
Recent History
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History
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Page 7
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2004-2014: Unprecedented
Slowing expected
Listings
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Threats
Currently 20+
Many recent listings
Industry consolidation
Phase-out of PUTs
Low local growth
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Tenant risk
Cannibalisation
Rising interest rates & currency
risk
Rising costs
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Property rates
Electricity
Tax Paradigm
Page 8
Requirements for REITs (JSE and Tax)
GROSS ASSETS
• Comply as a Property entity & section 13 of JSE Listing Requirements
• 75% = rental income
• Management to monitor risk
DEBT : EQUITY
• Confirm ratio is below 60%
• Latest consolidated IFRS financial statements
• Undertaking to restrict debt risk to increase on going basis
DISTRIBUTION
• Distribute at least 75% of its taxable earnings available for distribution to its
investors each year
• Tax disincentive to retain net income
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Tax Treatment for REITs (Established Principles)
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Page 10
Operating Level
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Normal tax principles generally apply
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However,
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Property sales are generally exempt from capital gains
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No depreciation of building structures (but
plant/machinery can be depreciated)
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Disposal of financial instruments are taxed as ordinary
revenue unless relating to qualifying property
investments
Distributions
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Distributions in respect of shares are deductible
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75% threshold
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Effectively eliminates REIT net income
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Distributions generate ordinary revenue for domestic
holders (often applied against investor borrowing)
Operational Technical Shortcomings
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Distributions
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Preserving deductions
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Depreciation for plant and machinery appears to be required
Deductible donations are effectively meaningless
Foreign currency
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Timing mismatch (75% threshold versus income/deductions)
Liquidations and unbundlings are taxable even though these distributions are largely capital in
nature
Foreign currency is taxed/deducted on a mark-to-market basis even though these gains and
losses do not match cash-flows
Very difficult to use currency hedges against dollar distributions
Disposal of subsidiaries of no greater than 20%
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Taxed as ordinary revenue even if the subsidiary is property-rich
Foreign REITs
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Form governs
Property trusts are probably flow-through entities (class
put model)
Property companies
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Probably CFCs
Active but exempt only if employees are located in the same entity
Outsiders
Institutional
► Pension funds
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Private
PIC/GEPF
Long-term insurers
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Page 13
Big four
Untaxed policyholder funds
Smaller players
► Little PLSs
► Flow-through
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Trusts
En commandite partnerships
Relief for Unlisted (Pending?)
Current Situation
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No regulations for unlisted
property vehicles
Pension funds and insurers
received temporary relief for
continued flow-through until
2016
No relief for unlisted property
vehicles held by private
individuals/companies
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Regulations?
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75% distribution requirement
75% rental income
Gearing – 60%?
Asset-size
Professional sales requirement?
Restrictions against capital
distributions?
Continental Africa
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Continental Africa as an Investment Destination?
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Countries of interest?
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Nigeria
Kenya
Zambia
Ghana
Angola
Risks
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Insecurity of tile
Too many smaller markets
Corruption and red tape
Lack of local financing
Continental African Tax
Distributions
► High-withholding rates
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Rise of capital gains tax on:
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Dividends
Interest
Treaty relief unexciting
Dual-linked units generally
respected (i.e. deductible
interest)
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Exit
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Immovable property company
shares
All shares
Rise of indirect sale regimes
(property and non-property)
Generally no property
investment vehicle relief (except
a few such as Nigeria and
Kenya and largely unworkable)
CV & qualifications
Keith Engel
Director – Tax Policy Africa
Direct Tel: +27 11 772 5082
Mobile: +27 82 455 5597
Fax:
+27 11 772 5748
Email: [email protected]
Background
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Keith joined EY on 15 June 2013 as the Tax Partner responsible for Tax
Policy across Africa. He has many years of experience as a Tax Professor
and as Chief Director of tax legislation within the SA National Treasury.
Part of Keith's role at EY is to advise African governments on tax
legislation and operations so these governments can achieve more stable
revenues without undermining economic growth.
Real estate experience
Government experience
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Skills
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In his capacity as Chief Director, Keith was the driving force behind the
South African REIT legislation
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Many speeches involving REITs
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Private advice involving REITs
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Continued involvement in REIT policy issues and REIT dividend withholding
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South African Treasury (Tax Legislation and Policy)
South African Revenue Service (Large Business Centre)
US Internal Revenue Service (regulations and private rulings
US Court of Federal Claim (Tax Opinions
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BSc
Juris Doctorate
Master of Laws in Taxation
EY | Assurance | Tax | Transactions | Advisory
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