Home Articles ANALYSIS: REIT South African real estate investment trust structure introduced

ANALYSIS: REIT South African real estate investment trust structure introduced

At last, a uniform structure for listed property assets, comments Craig Miller on the official introduction of the South African REIT structure on 1 May this year

The real estate investment trust (REIT) is an international standard that permits investors to invest in property assets through a vehicle which largely provides for tax transparent treatment.

More than 25 countries in the world use similar REIT models. Following the introduction of Section 25BB of the South African Income Tax Act in 2013, South Africa has now also adopted a uniform REIT regime.


Prior to the introduction of Section 25BB, South Africa had two forms of publicly traded property investment entities, namely property loan stock companies (PLSs) and property unit trusts (PUTs).

Both PLSs and PUTs were funds that invested directly into property. However, these funds were unevenly regulated and subject to different tax treatments, including the fact that PLSs were regulated in terms of the Companies Act while PUTs were regulated in terms of the Collective Investment Schemes Act.

In addition, a degree of uncertainty prevailed over whether PLSs were legitimately entitled to deduct interest on the debenture component of linked units issued to investors.

In August 2006, a two-day conference was convened involving many of the key role-players within the industry and regulators to discuss the way forward in developing a single basis for regulating property investment vehicles.

Estienne de Klerk was instrumental in spearheading the REIT initiative, which slowly developed support from stakeholders. Consensus was reached on the key points of the REIT regime, which culminated in the introduction of Section 25BB and the development of JSE Listings Requirements, which provided for a material part of the necessary regulation.

Conceptually, the structure of the REIT regime encourages good governance and best practices with its clear and adaptable structure and should continue to drive the significant growth that the property asset sector has experienced over the last decade.

The fact that the South African REIT regime is now similar to other international REIT regimes should make investment more attractive for the international market. International investors may now invest in a uniform property investment vehicle that is familiar to them.


A REIT is a company that owns and operates income-producing immovable property. The definition of a REIT in the Income Tax Act refers to a company that is a South African tax resident and whose shares are listed on the JSE as shares in a REIT, as defined in terms of the JSE Listings Requirements.

Consequently, a South African REIT also needs to comply with the JSE Listings Requirements for REITs which, inter alia, require that a REIT:

•          Owns property with a value in excess of R300 million

•          Maintains its debt below 60 per cent of its gross asset value

•          Earns 75 per cent of its income from rental or from property owned or investment income from indirect property ownership

•          Has a committee in place to monitor risk

•          Must not enter into derivative instruments that are not in the ordinary course of business, and

•          Must distribute at least 75 per cent of its taxable earnings available for distribution to its investors each year


Tax ‘flow through’

Section 25BB of the Income Tax Act contains three key definitions that are vital to understanding the tax implications of the current REIT regime. These are “controlled companies”, “property companies” and “qualifying distributions”. The interaction of these three definitions effectively allows a REIT to achieve tax neutrality.

A “controlled company” is a subsidiary of a REIT as contemplated in terms of International Financial Reporting Standards.

A “property company” is a company in which a REIT (or a “controlled company”) owns at least 20 per cent of the shares and where, in the previous year of assessment, at least 80 per cent of the value of that company’s assets was attributable to immovable property.

A “qualifying distribution” includes dividends paid or payable, or interest incurred in respect of linked debentures, by a REIT or a “controlled company” (but not a property company).

In addition, 75 per cent or more of the gross income of the REIT or “controlled company” must be attributable to rental income in the current year, if that REIT or “controlled company” was established in that year. In any other instance, the 75 per cent rental income rule is applied to the preceding year of assessment.

A REIT or a “controlled company” can deduct for income tax purposes all “qualifying distributions” to shareholders, which deduction may result in the entity not being subject to tax.

“Qualifying distributions” received by shareholders are not exempt from income tax and consequently, depending on the nature and tax profile of the shareholder concerned, may be taxable in their hands (pension funds, for example, will not be subject to tax on such distributions).

Dividend tax will be imposed on “qualifying distributions” to foreign shareholders subject to a reduction in terms of an applicable double tax treaty.

Other tax attributes

A REIT will not be subject to capital gains tax on the disposal of immovable property, or shares in a “controlled company” or “property company”.

Any amounts derived from a financial instrument held by a REIT or “controlled company” must be included in the income of that entity.

No securities transfer tax is levied on the transfer of shares in a REIT.

A drawback to private individual South African investors is that the interest exemption that previously applied to property loan stocks will no longer be available. The understanding is, however, that Government is moving to replace this incentive with mandated tax-free investment funds. The sector is currently waiting to see how this issue evolves.

REITs will also need to consider various tax issues such as whether they wish to hold property assets subject to a joint venture through a corporate formation, or via an undivided direct interest in the actual property assets.

If the assets are held through, say, a joint venture company that is defined as a “property company”, a REIT will receive an after-tax dividend from the property company as the “flow-through” treatment (which would otherwise apply to a REIT or a controlled company (that is, a subsidiary of a REIT)) will not apply to a so-called “property company”.

However, if a REIT or a controlled company held a direct, undivided share in the property asset, this issue would not arise as it could distribute its rental income via a “qualifying distribution”.

Where a REIT incurs debt to acquire at least 70 per cent of the shares in a target company or to acquire assets pursuant to an intragroup transaction as envisaged in terms of Section 45 of the Income Tax Act or via a liquidation, winding up or deregistration as envisaged in terms of Section 47 of the Income Tax Act, it would need to be carefully considered whether the recently introduced rules, which seek to limit the deduction of interest on acquisition debt, permit the REIT to deduct the interest incurred on the borrowing.

To the extent that the interest deduction is disallowed, a cash tax liability could potentially arise in the hands of the REIT. South African-controlled foreign company rules typically seek, in certain circumstances, to impute so-called “passive income” of foreign investee companies into the hands of the South African parent company for income tax purposes.

To the extent that a REIT seeks to invest offshore, it needs to carefully consider that “passive income” in the form of foreign rental income is not inadvertently imputed into its hands for South African tax purposes, particularly where little or no foreign tax (which may otherwise be creditable) is paid. This may happen because the foreign subsidiary enjoys a special tax dispensation in that foreign jurisdiction.


Although the practical implementation of the current REIT regime has resulted in certain anomalies which need to be addressed, it is submitted that it is a positive development and should play a meaningful part in sustaining growth within the property asset sector. ❐

Author: Craig Miller CA(SA) is Director, Mergers and Acquisitions Tax at PwC