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Proptrax - Listed Property Index

Property holding entities

What are these

In South Africa, most investment property is owned by financial institutions, pension/provident funds including government and parastatal funds, and by property holding vehicles listed on the JSE Limited.

At present the main investment vehicles in the listed real estate sector of the JSE are either property loan stock (PLS) companies or Collective Investment Schemes in Property (CISPs). CISPs are more commonly referred to as Property Unit Trusts or PUTs, a term derived from the previous statutory regime for these vehicles. The implementation by the JSE of the FTSE-JSE Africa Index series has resulted in a “Real Estate” sector which includes PUTs, PLSs as well as property holding and development companies, although the JSE continues to run a sub-index specifically for PUTs.

There are 5 PUTs and 13 PLS companies listed on the JSE. In addition, there are several very substantial unlisted PLS companies and many small to mid sized unlisted and private PLS companies. Many private property owning companies, including some of those structured as PLS companies, build up portfolios of investment grade property as a result of property development activities.

JSE Indices:
PUT -JSE code: J255
PLS - JSE code: J256

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Types of structures

PUTs

The PUT sector currently comprises 5 PUTs being Capital, Emira, Fountainhead, SA Corporate and Sycom with a total market capitalisation of approximately R30 billion.

Although under CISCA any collective investment scheme including a CISP may take any form including a company and an open-ended investment company (OEIC), at present all CISPs are in the form of PUTs, which are trusts. Until CISCA and the Income Tax Act are amended to deal adequately and consistently with forms of CISPS other than PUTs, it is not feasible for a CISP to be anything but a PUT.

A PUT holds a portfolio of investment grade properties. Each portfolio is listed in the “Real Estate” sector of the JSE.

PUTs are managed by management companies, responsible for the day-to-day operation of the portfolio of properties and for the investment strategy of the PUT.

PUTs are regulated vehicles governed by the Collective Investment Schemes Act under the auspices of the Registrar of Collective Investment Schemes - a Financial Services Board (FSB) function. The affairs of the management companies who administer the PUTs are governed by a Trust Deed between the management company and the PUT. In addition, PUTs are subject to all the regulatory requirements imposed by the JSE for listed securities.

In South African law trusts including PUTs may apply the flow through principle so that trust income distributed in the year of accrual is received by the beneficiary in the same form and character as it was received by the trust. The income of PUTs is generally rental from directly owned properties. However, if the PUT holds properties indirectly, which it may do via a wholly owned property company, it will also receive either interest or “property dividends”, depending on how it funded the company. Thus investors in PUTs may receive distributions comprising rental, interest or property dividends, with the latter in effect treated by SA tax law as interest.

PLS companies

There are currently 13 PLS companies listed on the JSE, major players like Growthpoint, Redefine and Pangbourne, with a combined market capitalisation of approximately R83 billion. In addition, there are several very substantial unlisted PLS companies.

PLS companies are incorporated under the Companies Act. If listed, they are subject to the JSE Listings Requirements.

An investor in a PLS company typically holds linked units comprising a share and long-term variable rate debenture. The terms and conditions of the debentures, including rate of interest payable and repayment dates, are governed by a debenture trust deed with an independent trustee appointed to look after the interests of debenture holders.

A PLS company distributes net pre-tax income to unitholders in the form of interest on the debenture component of the linked units. Within the PLS company, distributions are deducted as interest so that, after deduction of interest payments including distributions, a PLS company has little or no taxable income. In the hands of an investor, distributions received from PLS companies constitute interest and are taxed on the basis applicable to that investor.

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Summary

By securitising interests in portfolios spanning commercial, retail and industrial real estate, listed property vehicles allow all kinds of investors access to their choice of exposure to investment grade property providing comparatively good income yields and capital stability or appreciation. Without securitised property funds, these property investments would be inaccessible to the man on the street. In legislation around the world, policy makers have recognised the benefits of making investment property as broadly accessible as possible, making listed property vehicles attractive for direct and indirect savings and retirement planning.

Article courtesy of Hyprop :


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