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South African REITs: 2 Years Onward SA-REITs Association 22 October 2014.

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Presentation on theme: "South African REITs: 2 Years Onward SA-REITs Association 22 October 2014."— Presentation transcript:

1 South African REITs: 2 Years Onward SA-REITs Association 22 October 2014

2 Page 2 Economic Fundamentals

3 Page 3 Property as a Recognised Asset Class ► Listed financial instruments (recognised) ► Debt ► Shares ► Property: ► REITs (recognised) ► Unlisted property vehicles ► Hedge Funds (recognised) ► Infrastructure projects ► Private Equity ► Large ► Venture capital (recognised)

4 Page 4 Property Types ► Retail ► Full malls ► Strip malls ► Office ► Industrial ► Logistics ► Light industrial ► Other ► Hotels (very few) ► Residential (low yield) ► Power stations (not yet) ► Healthcare (not yet) ► Retirement (not yet) ► Mortgage REITs

5 Page 5 REIT Investor Objectives (Yield and Growth Mix) ► Historic ► Dual-linked units ► Legal contractual right to annual distributions ► Typically 95%+ of profits ► New REITs (JSE) ► Shares ► 75% minimum distribution requirement ► Typically 95%+ of profits ► Yield (amount versus sustainability) ► Method ► Sale to other investors ► No required redemptions ► Basis for growth ► Management ► Property selection DistributionsNet Asset Value (Upon Exit)

6 Page 6 Developmental Property Investments ► Institutional ► 70/30 ► Annual yield subsidises development ► Stand-alone ► Build or improve ► Goals ► Future annual yield ► Reinvest ► Cash-out ► Not suitable for forced annual pay- outs

7 Page 7 Economic Climate ► History ► 2004-2014: Unprecedented ► Slowing expected ► Listings ► Currently 20+ ► Many recent listings ► Industry consolidation ► Phase-out of PUTs ► Low local growth ► Tenant risk ► Cannibalisation ► Rising interest rates & currency risk ► Rising costs ► Property rates ► Electricity Recent HistoryThreats

8 Page 8 Tax Paradigm

9 Page 9 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

10 Page 10 Tax Treatment for REITs (Established Principles) ► Operating Level ► Normal tax principles generally apply ► However, ► Property sales are generally exempt from capital gains ► No depreciation of building structures (but plant/machinery can be depreciated) ► Disposal of financial instruments are taxed as ordinary revenue unless relating to qualifying property investments ► Distributions ► Distributions in respect of shares are deductible ► 75% threshold ► Effectively eliminates REIT net income ► Distributions generate ordinary revenue for domestic holders (often applied against investor borrowing)

11 Page 11 Operational Technical Shortcomings ► Distributions ► Timing mismatch (75% threshold versus income/deductions) ► Liquidations and unbundlings are taxable even though these distributions are largely capital in nature ► Preserving deductions ► Depreciation for plant and machinery appears to be required ► Deductible donations are effectively meaningless ► Foreign currency ► 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% ► Taxed as ordinary revenue even if the subsidiary is property-rich

12 Page 12 Foreign REITs ► Form governs ► Property trusts are probably flow-through entities (class put model) ► Property companies ► Probably CFCs ► Active but exempt only if employees are located in the same entity

13 Page 13 Outsiders ► Pension funds ► Private ► PIC/GEPF ► Long-term insurers ► Big four ► Untaxed policyholder funds ► Little PLSs ► Flow-through ► Trusts ► En commandite partnerships InstitutionalSmaller players

14 Page 14 Relief for Unlisted (Pending?) ► 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 ► 75% distribution requirement ► 75% rental income ► Gearing – 60%? ► Asset-size ► Professional sales requirement? ► Restrictions against capital distributions? Current SituationRegulations?

15 Page 15 Continental Africa

16 Page 16 Continental Africa as an Investment Destination? ► Countries of interest? ► Nigeria ► Kenya ► Zambia ► Ghana ► Angola ► Risks ► Insecurity of tile ► Too many smaller markets ► Corruption and red tape ► Lack of local financing

17 Page 17 Continental African Tax ► High-withholding rates ► Dividends ► Interest ► Treaty relief unexciting ► Dual-linked units generally respected (i.e. deductible interest) ► Rise of capital gains tax on: ► 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) DistributionsExit

18 Page 18 CV & qualifications Background ► 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 ► In his capacity as Chief Director, Keith was the driving force behind the South African REIT legislation ► Many speeches involving REITs ► Private advice involving REITs ► Continued involvement in REIT policy issues and REIT dividend withholding Keith Engel Director – Tax Policy Africa Direct Tel: +27 11 772 5082 Mobile: +27 82 455 5597 Fax: +27 11 772 5748 Email: keith.engel@za.ey.com@za.ey.com Government experience ► 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 Skills ► BSc ► Juris Doctorate ► Master of Laws in Taxation

19 EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. © 2013 EYGM Limited. All Rights Reserved. EY refers to the global organization and/or one or more of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organisation can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor. ey.com


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