'Treasury sidestepping tax issues'

Although Treasury has already had wide discussions with people in the listed property sector, concern remains that inadequate attention is being given to issues that will have a serious impact on the future of listed property.

The lack of clarity as to what the conversion will involve for property loan stock companies could become a thorny problem and delay the process, according to Madison executive director Mike Flax.

On Thursday Flax reacted to a presentation by the Treasury at the 12th African Congress of Shopping Centres that the South African Council of Shopping Centres (SACSC) arranged in Durban.

The listed property sector currently comprises property trusts and property loan stock companies as instruments for investment, and the purpose of the Reit structure is to bring about a more internationally acceptable structure.

According to the Treasury - which has been involved, since 2006, in a sustained consultations towards developing a South African Reit structure - the conversion tax would be based on the unrealised capital gains by each specific company. Property trust companies would not be affected because they are currently exempt from capital gains tax.

For property loan stock companies, explains Flax, this means that an older company with assets acquired before 2001 would have to pay far more to convert than a new one that had recently acquired its assets. A property loan stock company pays tax at a rate of 14% of its capital gains. "In the case of a centre that is sold realising a capital gain of R1bn, the company would therefore have to pay R140m."

He reckons if the cost of conversion is too expensive, this will dissuade property funds from converting - and the Treasury's aim is to establish as many Reits as possible.

The advantages of a Reit structure would be a more regulated investment environment, attracting foreign investment. "A strong Reit industry could be a catalyst for property development, driving gross domestic product growth."

He believes that a second dilemma is how property companies would fund the costs of conversion. These would have to be paid in cash over a period. If the problems can be surmounted, this sector would be converted into a Reit structure by 2011.

Britain experienced similar problems when it converted to the Reit structure in 2006, and after three years of negotiation it cost Liberty International 2% of its asset value to make the change. This amounted to £154 million or 41p/share, payable over three years.

- Fin24.com