By Ian Fife
SA listed property will join world trend in its own style if government comes for the ride
The world is in the early stages of the greatest financial liquidity in history, and it is already bringing about a global revolution in property investment. SA must quickly become part of it.
That's the message Sam Zell gave SA's big property owners, who held a conference in Johannesburg last week to explore how to make the JSE-listed property sector more attractive to international investors.
Zell heads the biggest real estate investment trusts (Reits) in the US . He says much of the capital flow will come from baby boomers - 85m Americans and a similar number of Europeans heading into their 60s - who have wealth, a long life ahead of them and a great need for income-producing investments.
"They will invest their money around the world in search of the highest, most predictable income," he says.
This is music to the ears of listed SA property managers, whose forward yields of around 9% are treble the 3% available from US Reits and 50% more than the 6% investors get in Australia.
Demand for yield is revolutionising property around the world, with listed funds in 30 countries already adopting Reit structures. But Zell and international experts warn that the SA property vehicles must be tax transparent, accessible, liquid, simple, flexible, predictable, recognisable and managed to international standards.
In other words, the 30 property unit trusts (PUTs) and property loan stock (PLS) companies must become Reits.
"A liquid property market, that is Reits, is a core characteristic of modern economies," says John Kriz, New York MD of real estate at Moody's, the rating agency. "SA can do it in its own way. But the liquidity, transparency, accessibility and flexibility are the chassis common to all liquid property and around which each country can fashion its own investment vehicles."
PUTs and PLSs meet many of the requirements. But each is flawed. Though tax transparent, PUTs are bound in servitude to the narrow regulation of the Financial Services Board and lack flexibility. They can't invest in other listed funds.
PLSs are free to invest and borrow at will, but their debenture structure - which pays interest instead of dividends - is bumping into claims of usury from the SA Revenue Service. And they must pay capital gains tax.
The rewards of Reitism are great: large injections of long-term investment into SA; "yield compression" as SA listed forward yields fall from 9% towards 6%; and even lower and greater awareness of other investment opportunities in SA by offshore investors. There is likely to be more volatility, but this is a small price to pay for the riches.
Convergence of tax treatment with the rest of the world is also an important benefit, says independent fund analyst Lil iane Barnard.
The PLS Association's Brian Azizollahoff says the increased capital of the funds and their low yields could also put them in a position to invest in low-cost housing on the subcontinent.
Almost every overseas expert names management as the most important criterion for investors. SA has a few highly regarded property fund managers, but the quality will have to be more widespread. And the international community prefers in-house management; most of SA's funds are under outsiders.
Liquidity comes with size and the sector, at a market capitalisation of R70bn, is hardly bigger than one of Zell's Reits - and little more than 10% of Australia's R500bn market cap sector. Foreigners have only a 2% holding in the biggest fund, Growthpoint, which has a market cap of R10bn.
"Australian investors are looking at putting funds into Korea and Eastern Europe, so there is no reason why they shouldn't take to SA," says Credit Suisse Australia's Sarah Cooper. "But SA is just not on the agenda now."
Historic underdevelopment and local authority difficulty in getting land zoned for more development mean the sector will grow slowly. Tensions were revealed between PUT and PLS managers at the conference.
Major consolidation of existing funds is one way the local Reits could go, combining, say, Hyprop, Redefine, ApexHi and their listed manager Madison into a R21bn Goliath.
But before that, government must agree to capital gains and income tax transparency. It will also have to introduce new legislation via the treasury, which is overloaded with pending laws.
Government has about R150bn in property itself that could help grow the sector. It will also have to deal with grassroots objections to foreign property ownership. They could seriously delay the move to Reits. But Azizollahoff says treasury staff at the conference asked for a meeting afterwards.
"It looks like they want this process to be done quickly," he says.