Real Estate Investment Trusts (REITs)
What is a REIT?Real Estate Investment Trusts (REITs):
- Companies that manage, operate and own a real estate portfolio
consisting of income‐producing property e.g. commercial property
- Have equity and bond features e.g. cash distribution (profits) and
capital growth (share price)
- JSE listed property investment vehicles that also trade on the JSE;
- The share price of REITs is determined by demand and supply and
therefore the potential to incur capital gains is possible;
- REITs allow investors to reap the benefits of owning property as an
asset class without directly owning and managing property.
- Previously Property Unit Trusts (PUTs) and Property Loan Stock (PLSs) companies existed on the JSE
- Now these have adopted the REIT regulatory framework
- Company REITs (“old PLSs”)
- Trust REIT (“old PUTs”)
- REITs give investors indirect exposure to a wide variety of expertly managed properties.
- REITs are supported by lease agreements which increase/grow on an annual basis.
- Investors may gain exposure to immovable property with lower initial outlays
- REITs are exempt from Capital Gains Tax (CGT) in respect of the disposal of the its immovable property, shares in another REIT or shares in a controlled property company.
- REIT shareholder will only pay CGT when the REIT share is sold
- Interest distributions by a REIT (or a controlled property company) payable to South African resident investors are re‐characterised as taxable dividends, but dividends withholding taxes will not apply
- Where the recipient is a non‐resident investor, the dividend will remain exempt from income tax.
- REITs are traded on the JSE and are considered more liquid than the physical properties
- REITs, notwithstanding the JSE Listing Authority, are subject to the REIT legislation particular to the country in which the company is incorporated, the Companies Act as well as their own Articles of Association or the Collective Investment Schemes Control Act
- The share price of REITs is determined by market forces (demand and supply) and is visible to the public.
- When purchasing these securities through a stockbroker investors will
incur brokerage fees as well as other fees.
- The price of these securities is determine by the forces of demand and
supply. Thus investors are exposed to market risk as well as other risk
factors specific to immovable property.