Offshore Property and South African REITs

REITs, or real estate investment trusts, are companies that own or finance income-producing real estate in a range of property sectors. These companies have to meet certain requirements to qualify as REITs. Most REITs trade on the major stock exchanges and own several kinds of commercial properties in SA, such as warehouses, factories, hospitals, shopping centres, office buildings and, to a lesser extent, residential properties. Some also invest in properties overseas.

A JSE-listed SA REIT must inter alia:

  • Own at least R300 million worth of property;
  • Keep its debt below 60% of its gross asset value;
  • Earn 75% of its income from rental or from property owned or investment income from indirect property ownership; and
  • Pay at least 75% of its taxable earnings available for distribution to its investors each year

One advantage of REITs is that they are not subject to capital gains tax on the disposal of immovable property, or shares in a ‘property company’.

The South African listed property sector has exposure in over 25 countries. 45% of the FTSE/JSE SAPY Index earnings come from outside South Africa and over 50% of listed property in SA is exposed to offshore markets. International markets offer attractive initial yield spreads and the offshore investment destinations have higher GDP growth rates than SA.

To date, no SA REIT has achieved true global exposure i.e.: being invested in all the major global markets in the world. Some REITs do, however, have large representative businesses in specific markets, for example, NEPI Rockcastle is the largest real estate firm in Central and Eastern Europe (CEE) and Growthpoint Properties Australia is the 11th largest REIT on the ASX.

Our REIT sector had a poor showing in terms of overall performance in the first quarter of 2018. The listed property sector’s rebased second-half showing is set to be driven by a combination of domestic and international macro-developments. According SBG Securities, global monetary policy shifts in developed markets sparked a broad sell-off in emerging markets. Catalyst Fund Managers’ director and portfolio manager, Zayd Sulaiman, has also been quoted saying that the global political and economic events, including trade wars, EU stimulus tapering and the rising foreign interest rate environment do not bode well for emerging markets in the short-term. Adding to the challenging period ahead are oversupply (especially in the office sector), costly capital and increased scrutiny into quality of earnings and governance.

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