Academic journal article Journal of Real Estate Literature

An Overview of the Initial Performance of the South African Reit Market

Academic journal article Journal of Real Estate Literature

An Overview of the Initial Performance of the South African Reit Market

Article excerpt

Cruz (2016) defines an emerging market as a market that shows significant growth in short-term production while at the same time showing signs of political and financial instability. The author also defines South Africa (SA) as an emerging market. The diplomatic-political entity known as BRIC (Brazil, Russia, India, and China) was established in 2006. South Africa was later included in this entity in 2011, upon which the acronym was changed to BRICS. BRICS was formed out of the realization that the member countries represent emerging markets whose economies are forecast to undergo rapid growth in the near future (Gauteng Province, 2013). Since its inception, BRICS countries have increased their participation in international markets, which serves as proof of an increase in the importance and overall profile of this diplomaticpolitical entity (Huidrom, Kose, and Ohnsorge, 2016).

As a result of the rapid growth forecasts in emerging markets, these markets offer lucrative investment opportunities for both foreign and domestic investors. The establishment of real estate investment trusts (REITs) therefore has created an opening for investing in real estate in emerging markets, providing investors with an alternative means of diversifying their portfolios. Consequently, this has prompted studies on REITs in emerging markets such as Turkey (Aktan and Ozturk, 2009) and Bulgaria (Kanaryan, Chuknyisky, and Kasarova, 2015). Researchers believe that the addition of real estate to an investment portfolio has the potential to improve the overall performance of the portfolio, while offering alternatives to direct asset investment and the opportunity to bypass the challenges of liquidity that are typically faced by investors in the real estate industry. The inclusion of South Africa into BRICs in 2011 and the implementation of the REIT structure (Aktan and Ozturk, 2009) in 2013 have resulted in South Africa being in the category of emerging markets with regards to REITs.

Before 2013, there were only two forms of publicly traded investment entities for property investment in South Africa, namely property loan stock companies (PLSs) and property unit trusts (PuTs), available to investors. PLss and PuTs are essentially mutual funds that invest in real estate. REiTs, which can be a company or a trust, offer investors worthwhile tax benefits and considerable income streams, and were introduced to South Africa in 2013 in order to address issues identified with the then used property investment vehicles: PLSs and PuTs. Although often referred to as REiTs in the past, PuTs and PLSs differ from REiTs structurally, particularly within the areas of legal, tax, and legislation matters (Olaleye, 2011), whereby the PLS and PuT structures were mostly criticized for the double taxation that they imposed on the investor. in order to address these problems, the REiT structure was introduced to South Africa, thus converting some existing PLSs into company REiTs and PuTs into trust REiTs. The structure of PuTs and PLSs is not internationally recognized and thus does not encourage foreign investment. These two entities are also subject to different rules and legislation despite both trading in property shares, and the unclear tax matters regarding PLSs induced their conversion into REiTs (KPMG Services, 2013). The aim of introducing the REIT structure to the country is to address these issues. REiTs' straightforward and favorable taxation system makes them appealing to investors and, by being similar to international structures, SA REITs present themselves more favorably to global investment. Additionally, this structure allows for an easier comparison of SA REIT performance with other global REITs (Boshoff and Bredell, 2013; KPMG Services, 2013). After the establishment of REITs in South Africa in 2013, the majority of eligible JSE listed real estate investment entities applied for REIT status, drawn by the flexibility and tax certainty they offer as compared to PUTs and PLSs (De Klerk, 2013). …

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