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Property Funds in South Africa Set for Strong 2013

South Africa’s historically low interest rates are giving a major boost to the property sector in the country with a wave of property funds listings over the past year and a half, Nick Wilson of BDlive.co.za. wrote on Wednesday, March 20. The combined market capitalisation of local listed property funds increased from about 5 billion ZAR (₤3.53 billion) in 2000 to more than 200 billion ZAR(₤141 billion) at the end of last year. An important driver for the sector’s growth has been its stellar performance with an average return of about 26 percent a year.

According to Growthpoint Properties chief executive officer Norbert Sasse, as long as interest rates remain at their current level, there will be plenty of new listings. “We saw six or seven new listings last year and I would expect to see another half a dozen this year,” Sasse said, as quoted by BDlive.co.za. “The challenge is finding quality assets to bring to the market as well as offering some kind of differentiation because in my mind those guys who came last year [with new listings] have sucked up some of the liquidity [in the sector].”

Bizcommunity.com quoted Gindrod Asset Management chief investment officer Ian Anderson as saying that with distribution growth expected to accelerate towards eight percent this year and next, South Africa’s listed property sector “looks poised for another year of inflation-beating returns, although not the 36 percent-plus return investors enjoyed last year”.

!m[Introduction of REIT Structure Expected to Stimulate the Sector](/uploads/story/1690/thumbs/pic1_inline.jpg)
One potential handicap for the South African property funds is their structure – most foreign investors are unfamiliar with the property unit trust and property loan structure. In this context the introduction of the real estate investment trust (REIT) structure in South Africa from April 1 might give yet another boost to the sector. To qualify as a REIT, a property vehicle needs to be trading on the Johannesburg Stock Exchange in the REIT sub-sector and 75 percent of its revenue must come from rentals. According to Macquarie First South Securities analyst Leon Allison, after the adoption of the REIT structure, South Africa would become the eighth-largest REIT market globally. However, something that might turn foreign investors off is a new foreign withholding tax of 15 percent to be introduced from January 1, 2014.

Listed REITs in South Africa will have the advantage of being governed by the JSE’s listing requirements, they offer “a well-established governance and investor protection regime,” said Java Capital director Andrew Brooking. The challenge for unlisted REITs will be to ensure the same level of corporate governance and investor protection offered bythe publicly traded REITs.

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