THE implementation of the real estate investment trust (Reit) structure in South Africa’s commercial property sector is likely to be "credit-positive" for the industry, according to ratings agency Moody’s Investors Services.
The internationally recognised structure, which is due to come into effect next month and has been well received by both industry players and analysts, will offer South African property companies — property loan stocks and property unit trusts — the opportunity to operate under a single, simpler regulation umbrella.
Reit tax legislation for South Africa was published in October last year, after years of preparation by the listed property sector and Treasury.
Meanwhile, final changes to the JSE’s listing requirements to allow for the creation of Reits have yet to be announced after the JSE’s public consultation process ended in late January.
Changes flagged as positive include the exemption of Reits from paying capital gains tax when selling assets, and the removal of the deferred tax liability from the balance sheet, which will increase the company’s net asset value.
"Generally, from a rating agency perspective, we see the move as credit-positive. Ultimately, that also depends on the final draft of the requirements," Moody’s assistant vice-president and analyst Dion Bate says.
The structure carries "a number of positives", including a simpler, more certain tax structure.
Grindrod Asset Management chief investment officer Ian Anderson agrees that the move to Reits is "credit-positive" as "it broadens the capital base for these companies".
"It gives them access to a greater source of capital providers, and also — most importantly — it takes care of tax certainty."
Foreign investors were previously "reluctant to invest into our listed property sector simply because they were concerned that at some point the South African Revenue Service (SARS) would close the variable PLS (property loan stock) loophole, which they are now going to do".
Mr Anderson says that under the existing system, property loan stock companies — which have a linked units capital structure where debentures are linked to shares — are able to pay out all of their income irrespective of the value of the debenture.
The loan stock would get a tax deduction for its payments out of its profits to its debenture holders.
As the company’s distribution income grows, the distribution as a percentage of the original issue price of the debenture "increases to the point that it looks as though they are fudging the books".
"It was a grey area and it had been raised on numerous occasions by SARS," although this was never an issue for property unit trusts which have already been considered as Reits globally.
"While this certainly will calm international investor fears about the tax issue, a significant problem for foreign investors remains the sector’s size and the liquidity in the sector. So the Reit regime is only going to benefit the very largest listed property companies," Mr Anderson says.
A portion of the strong performance of the listed property sector over the past six months "can be attributed to the fact that foreign investors started buying listed property companies in South Africa in anticipation of the change".
"The only real risk around the loan stock companies was what happens if the taxman closes the variable loan stock loophole, and now that’s gone away, so that is a very positive event from a credit perspective," Mr Anderson says.
Gary Vogelman, a tax executive at ENS, says "it’s a positive change, aimed at providing a lot of clarity on what was previously a grey area in relation to interest deductions".
Mr Vogelman says it is new legislation that needs to be read carefully together with the JSE’s listings requirements.
"It’s important to ensure compliance with these rules because if you are a Reit and then you cease to be a Reit because you no longer meet the listings requirements, it’s a bit like unscrambling an egg, and that’s disastrous for shareholders and the company."
As such, companies should carefully consider the option before converting, he says.
John Burke, director of issuer services at the JSE, says the JSE "is still in consultation with the various parties on the finalisation of these proposed rules".
"Our objective remains to issue the proposed rules as soon as possible and all parties involved are working hard to achieve this goal. We can, however, provide no certainty on the expected timing of issue of the proposed rules," Mr Burke says.