Will SA get real estate trusts?
Classic Business Day speaks to Brian Azizollahoff - chairman of the Property Loan Stock Association (PLSA) marketing committee, and Redefine chief executive - about the future possibility that real estate investment trusts will bring SA in line with the international property sector
LINDSAY WILLIAMS: Brian, what is a REIT?
BRIAN AZIZOLLAHOFF: The real estate investment trust is a term that was coined in the United States in 1960 when the US Congress supported the formation of property companies in order to give the common man in the street the ability to invest in a listed property company.
LINDSAY WILLIAMS: In South Africa weve got property unit trusts (Puts) and property loan stocks - in the US theyve got REITs. Are REITs everywhere else as well?
BRIAN AZIZOLLAHOFF: REITS have caught on all over the world, and in fact recently the UK promulgated legislation allowing the formation of REITS that will be implemented on 1 January 2007. Germany is going the same way and that will then bring most of the countries that have a listed property sector in line.
LINDSAY WILLIAMS: Its taken a long time for even developed world economies to take up the REIT concept - so were not that far behind. What is the reason for doing it? What are the advantages compared to the system we have already?
BRIAN AZIZOLLAHOFF: Right now the South African property sector is confusing in that we have a number of different structures - you mentioned the property unit trust (Put) and the property loan stock (PLS). Essentially a REIT is the best of both - there are a number of similarities and differences. Just to highlight three or four of the main ones - unlike a Put, the REITS and PLS can invest in other listed companies. Puts have a limitation on the amount of gearing - what they can borrow - but the PLS and REITS does not. Like Puts, REITS are exempt from capital gains tax (CGT), but in all cases in fact in excess of 90% of distributable income is actually distributed to unit holders.
LINDSAY WILLIAMS: So there are tax benefits, there is a liberalisation benefit as well - apart from the benefits to the investor there must be some benefit to Sars and the government otherwise they wouldnt be embracing it?
BRIAN AZIZOLLAHOFF: There would be a benefit in that if we can grow the sector - by standardising to international norms - we think that this sector will grow, and a larger sector means a greater investor base and that increases the tax revenue base.
LINDSAY WILLIAMS: Obviously that means the big fund management companies overseas - I know for a fact that US fund manager Fidelity is a regular visitor to these shores thats interested in the property sector of the JSE - does this sort of legislation adopting international norms mean companies like that will have a fresh look at property in South Africa?
BRIAN AZIZOLLAHOFF: We believe they will. In meetings Ive had with foreign REIT analysts theyve all expressed interest, but our sector is very small relative to the New York Stock Exchange. As one example our total market capital of this sector is US$12.5-billion. One REIT company in the US - thats Equity Property Group - has a market capital of $18-billion, and theres 159 listed REITS in the United States.
LINDSAY WILLIAMS: Were going to get there presumably with these changes - because with these changes more stock will probably come onto the market, and the market cap will grow?
BRIAN AZIZOLLAHOFF: The biggest advantage will be an increase in liquidity - with an increase in liquidity we attract interest not only from investors, but also from vendors who otherwise would not have been interested in selling their properties for paper - so essentially listed paper becomes a currency, and it facilitates the growth of existing funds.
LINDSAY WILLIAMS: So this is quite an exciting unlocking of potential for the sector - whats the timetable from here? How soon can we expect legislation to be passed?
BRIAN AZIZOLLAHOFF: The process has already begun, in that weve started to engage with Sars. We are hoping that the government will be cooperate and will recognise the advantages of converting to a REIT structure. Based on the fact that we have a precedent from the UK we hope it wont take all that long.
Presenter: Lindsay Williams