Property gets tax boost
Classic Business Day asks Angelique de Rauville from Provest Fund Managers about the effect Budget 2006 is having on the property sector, Richard Hirsch from Standard Equities and Derivatives is at the studio

LINDSAY WILLIAMS: The Budget is with us for the next twelve months until the next one - has it provided a boost to the property sector?

ANGELIQUE DE RAUVILLE: Without a doubt. Certainly the tax-free portion of interest and taxable dividend income increasing for private individuals had a small advantage for the listed property sector, but the big advantage came in the reduction of pension and provident fund tax from 18% to 9%.

LINDSAY WILLIAMS: Why should that affect the listed property sector more than the JSE in general?

ANGELIQUE DE RAUVILLE: Basically the real estate sector comprises three stocks - traditional property companies that distribute post-taxation dividends where there’s no benefit, but for the pre-taxation interest income generating property unit trusts and property loan stocks there is an advantage. Now pension and provident funds will only be taxed at 9% on all that interest income they earn from their property unit trusts and loan stock investments.

LINDSAY WILLIAMS: So those people saying it’s been an outperforming sector even above the 40% we’ve been used to from the all share and it can’t go on may be eating their words in a month’s time - I know for a fact that institutional investors are underweight this sector aren’t they?

ANGELIQUE DE RAUVILLE: They are, particularly in the South African context. They are coming in with weightings in the listed property sector below 1.5%. In the global context that’s closer to 4% or 5%. Weightings are low, and this is an opportunity - given the reduction in pension and provident fund tax - for them to increase their asset allocations to listed properties.

LINDSAY WILLIAMS: Why do you think they’re so low at the moment? Is it because of liquidity, is it because of other reasons?

ANGELIQUE DE RAUVILLE: The issue remains one of size as far as the market capitalisation is concerned - given the fact that it still only forms 2% of the total JSE bourse. It’s critical from here forwards that we start to see an increase in the market capitalisation of the listed property sector through the unitisation of physical property assets.

LINDSAY WILLIAMS: It’s not just the momentum from the last couple of years, it’s also the consolidation in the industry that interests many people.

RICHARD HIRSCH: I’m a single stock futures trader. I make markets - I’ve got a lot of clients that trade Metboard, and they’ve obviously been trading in anticipation of this Growthpoint Metboard deal that’s on the table. The announcement yesterday was quite a long-winded announcement - can you just break down the crux of the deal for us?

ANGELIQUE DE RAUVILLE: Sure. The effective date of the transaction is expected to be the 1 July 2006 – unit holders have been offered one Growthpoint for every 1.9 Metboard units they hold.

RICHARD HIRSCH: There’s a distribution that’s going to be coming out of Growthpoint soon - are the Metboard shareholders going to be entitled to that distribution in that ratio?

ANGELIQUE DE RAUVILLE: When you are doing your calculations regarding that ratio, you need to take into account the fact that Growthpoint does have a June year-end, and Metboard has a March year-end. There will be an adjustment that needs to take place for the fact the effective date is 1 June, and there will be a three month distribution payable to Metboard unit holders for the period 1 April to the end of June.

LINDSAY WILLIAMS: Well answered. In more general terms now - as the market capitalisation of the sector increases that opens the sector up to fund managers that have previously been barred from it - any enquiries from overseas fund managers at your company?

ANGELIQUE DE RAUVILLE: Regularly, it’s certainly on the increase. We are probably fielding at least one enquiry a week from serious players internationally.

LINDSAY WILLIAMS: What do they say?

ANGELIQUE DE RAUVILLE: They are saying they’re increasing their weighting to property - they’ve been underweight property, and they’re increasing it in the region of 6% to 8%. Looking in the US and European markets they’re battling to see value, so they’re knocking on the doors of emerging market countries - South Africa is generally one of their first ports of call.

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