SACSC BREAKFAST 20 November 2014 REIT INDUSTRY OVERVIEW 2 A short - - PowerPoint PPT Presentation

SACSC BREAKFAST

20 November 2014

A short history:

• 2006 Sector approaches National Treasury and SARS
• 2006 REIT Reality Conference
• 2007 National Treasury Discussion paper
• 2009 Whitepaper
• 2011 SEC 8G – TLAB
• 2013 SEC 25BB – REIT Rules

“The Regulation” SEC 13 of JSE Listing Requirements

REIT INDUSTRY OVERVIEW

2

REIT INDUSTRY OVERVIEW

3

Historic performance vs interest

Source: Bloomberg 100 200 300 400 500 600 700 800 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14

SAPY vs Global REIT Indices

Australia EPRA US South Africa Growthpoint UK

DEBT

4

4 4.5 5 5.5 6 6.5 7 7.5 8 8.5 9 2-Jan-12 2-Feb-12 2-Mar-12 2-Apr-12 2-May-12 2-Jun-12 2-Jul-12 2-Aug-12 2-Sep-12 2-Oct-12 2-Nov-12 2-Dec-12 2-Jan-13 2-Feb-13 2-Mar-13 2-Apr-13 2-May-13 2-Jun-13 2-Jul-13 2-Aug-13 2-Sep-13 2-Oct-13 2-Nov-13 2-Dec-13 2-Jan-14 2-Feb-14 In % 10-year swap rate 5-year swap rate 1-year swap rate

Author:

5

Sources: Eurostat, JP Morgan, FTSE, IPD, MSCI, Bloomberg, EPRA, NAREIT Data as of: September 30, 2014 Note: Based on assumptions made by EPRA

Strong Long Term Performance

0.5% 3.4% 2.6% 4.5% 3.9% 1.3% 4.9% 4.5%

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0%

Global Bonds Global Equities Global Real Estate Global Listed Real Estate

Capital Growth Yield DIRECT LISTED & REITs 15-year annualised total return in local currency

Asset Type

REIT INDUSTRY OVERVIEW

6

Source: STANLIB Research

53% 28% 15% 2% 1% 1% Retail Office Industrial Hotels Residential Other

Author: EPRA 2012

Sources: FTSE, EPRA, NAREIT Data as of: August 30, 2014

Global Property Sectors

4% 30% 25% 13% Residential 10% Health Care 7% Industrial 6% 4% Self Storage 3% 2%

Diversified Retail Offices

Industrial/

Offices

Lodging & Resorts

Foreign exposure

REIT INDUSTRY OVERVIEW

8

Source: Avior Research

0.5 1

NEPI Redfine… Rockcastle Intu Capital &… Investec… Fortress Resilient Growthpoint Redfine… Capital Property Emira Sycom Acucap Hyprop Australian Dollar British Pound Euro US Dollar

Foreign earnings as a % of total earnings

SOUTH AFRICAN LISTED REAL ESTATE

9

• The South African listed property sector has experienced significant

growth over the past 10 years

• South Africa’s listed largest property company, Growthpoint, now has a

market capitalisation of R60 billion compared to R30 million in 2002

Source: Mcgregor 36 53 71 100 95 103 129 144 198 226 294 50 100 150 200 250 300 350 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Market Cap -R Billions

South African Listed Sector

SA LISTED REAL ESTATE

10

Source: Mcgregor 10 20 30 40 50 60 70 GRT (Post ACP & SYC) Growthpoint Redefine Resilient Hyprop Capital Fortress Acucap Vukile Fountainhead SA Corp Emira Arrowhead Sycom Investec Octodec Rebosis Dipula Hospitality Synergy Market Cap -R billions

South African Listed Property Companies

SOUTH AFRICAN LISTED REAL ESTATE (cont’d)

11

• Attractiveness of the sector keeps improving:

 Attracting new listings to the sector  Equity raising well supported by local institutions  Increase in interest from offshore investors  Increase in liquidity and tradability

Growthpoint Capital Resilient Hyprop

FPT

Acucap

SAC

Redefine Emira Sycom Vukile 0% 10% 20% 30% 40% 50% 60% 70% 80% 10 20 30 40 50 60 Liquidity % (year) Market Cap -R (billion)

Sector Liquidity

Investec Source: Mcgregor

Capital Raised

REIT INDUSTRY OVERVIEW

13

Source: STANLIB Research

Year Amount Raised 2011 R16bn 2012 R11bn 2013 R18bn 2014 (up to November) R35bn R80bn

SOUTH AFRICA ENTERED A NEW REIT ERA

14

• 75% of South Africa’s listed property companies were not REITs
• These companies now synthetically created rental flow through the

Property Loan Stock structure – share stapled to debentures

• South Africa’s weighting in the global REIT indices could potentially

quadruple

• South Africa is the 8th largest REIT market globally
• South Africa’s largest listed property company, Growthpoint Properties

Limited (“GRT”) is the 40th largest REIT globally by market capitalisation

• Excluding the US REITs, GRT is the 15th largest REIT globally by market

capitalisation - the largest in emerging markets

Sources: FTSE, EPRA, NAREIT Data as of: September 1, 2014

Regional Breakdowns

150 constituents Mkt Cap EUR 119 Bn. 52.6% 32% 16%

Developed

North America Asia EMEA 306 constituents Mkt Cap EUR 927 Bn. 56% 26% 18%

Emerging

Asia Pacific EMEA Americas

Index Sth Africa Wgt % Gross Yield Global Dev & EM 1.3% 3.7% EMEA Dev 9.0% 3.6% EMEA EM 45.0% 3.8% Global EM 11.8% 3.9%

WHO COULD BECOME THE LARGEST REIT MARKET GLOBALLY?

16

• US REITs still dominate globally
• South Africa could become significant REIT

market

US REITs 61.0% Non-US global REITs 39.0% Australia 24% France 15% Japan 13% Canada 13% UK 11% Singapore 9% South Africa 6% Hong Kong 5% Turkey 2% Belgium 2%

Author:

17 2 Countries 16 Countries 1 Country 6 Countries

Developed Global Emerging Global

Emerging Europe Emerging MEA

5 Countries 5 Countries 9 Countries 8 Countries

Emerging Americas Emerging EMEA Emerging Asia

Each index has multiple sub-indices: 9 Sectors Rental or Non-Rental REIT or Non- REIT

Developed EMEA Developed Asia North America

FTSE EPRA/NAREIT Global Index

Global

Developed Europe Developed MEA

Weight = 1.3%

Author:

FTSE EPRA/NAREIT Global Index

Gross Mkt Cap South Global Europe South Africa Co’s Yield (FF) EUR Africa % Emerging % Equal 86 co Rank Growthpoint 6.7% 3,624 26.8% 3.2% INTU 6 Redefine 7.6% 2,243 16.6% 2.0% Icade 20 Hyprop 5.4% 1,529 11.3% 1.3% Cofinimmo 24 Resilient 4.2% 1,369 10.1% 1.2% Wereldhave 26 Capital Property 6.6% 1,275 9.4% 1.1% Merlin 27 Attacq 0.0% 641 4.7% 0.6% Vastned 51 Vukile 7.4% 628 4.6% 0.5% Alstria 52 SA Corporate 8.0% 606 4.5% 0.5% Norway Prop 55 Emira 8.0% 486 3.6% 0.4% NSI 61 Acucap 7.1% 425 3.1% 0.4% PHP 64 Fountainhead 6.8% 251 1.9% 0.2% Dios 77 Arrowhead (B) 7.8% 218 1.6% 0.2% DIC 79 Arrowhead (A) 7.9% 218 1.6% 0.2% DIC 79 South Africa Total 6.3% 13,514 100% 11.82%

18

FTSE EPRA / NAREIT GLOBAL INDEX

19

South Africa weights in the index Index Wgt % Gross Yield Global Dev & EM 1.3% 3.7% EMEA Dev 9.0% 3.6% EMEA EM 45.0% 3.8% Global EM 11.8% 3.9% South African companies gross yield +6%

FTSE EPRA/NAREIT Global Index

20

Index Use:

• Specialist Managers
• Pension Funds
• Global ETFs market
• US$ 10.5bn AUM
• Futures contracts – Europe
• OTC products

You need to be on investors radar!

BENEFITS OF REITs

21

• The smallest investor can obtain exposure to large commercial property e.g. V & A

Waterfront, Hyde Park Shopping Centre etc.

• Property is a separate asset class that has different correlations to cash, bonds and equity
• Investment is liquid and tradable with low transaction costs
• Benefit of scale and diversification reducing risk
• Pre-tax yield that is predictable
• Due to professional management and lower costs of debt it outperforms physical property
• Ease of funds introduced and remitted is extremely comforting for foreign investors
• Make use of the competitive labour costs: in professional services, wages are around 50% of

levels in Europe, and for manufacturing jobs, labour costs are around 1/3 cost of Europe

• Been great performer over the past 14 years vs other asset classes:

22

SA REIT REGIME

WHY DID WE NEED REITS

23

• Disparate and inconsistent tax regime for property investment entities
• Internationally recognised tax dispensation optimal for the growing

industry

• Current listed property entities have inherent tax problems
• Usurious/excessive interest on debentures
• Debenture interest deductibility problems
• Capital Gains Tax (CGT) on property sales – double tax
• Empowerment

STRUCTURE OF REGIME

24

Listed on JSE REIT Board

JSE “Regulator” Taxation Legislation Amendment Bill (2013) (TLAB) Tax Dispensation” Listings Requirements Section 13 Section 25BB Company REIT Trust REIT PLSs 20 PUTs 6

REGULATION

25

• Objective: -

Provide investor protection

• Ensure prudent management without unnecessarily removing

flexibility

• Transparency and good governance
• Regulator:

Johannesburg Stock Exchange (JSE)

• Regulatory Rules:

Listings Requirement Section 13

• Responsibility:
• Board of Directors
• Annual confirmation to be submitted in Certificate in Compliance
• No prescribed management model: internal or external
• No prescribed property sector investment requirement
• Empowerment

Initial On-going R300 million – Property Assets √ √ Pay 75% of Distributable Income Annually √ √ Maintain LTV Below 60% √ √ Committee to ensure risk management and annual risk disclosure √ Only enter into derivatives in ordinary course of business √ 75% of revenue “Rental” √ Tax test

TAXATION

26

• Tax Act remains applicable in full and each REIT has to submit tax returns

annually for the listed entity and its subsidiaries

• REITs retain tax losses accrued to date
• Applicable to controlled property companies - subsidiary as defined by IFRS
• Section 25BB provides the tax dispensation

 No entry tax to become a REIT  No CGT on sale of properties  All Section 13 property allowances fall away  Distributions on shares and debentures are deductible expenses  Profit on minority stakes (<20%) and financial instruments disposal to be deemed income  Rental / distribution received on minority shares not part of “rental income”

IMPLICATION FOR INVESTORS

27

Local Investor

• Will receive gross distribution in the form of taxable dividend free of dividend

withholding taxes

• Tax on distribution at each shareholder’s applicable tax rate
• Shareholders can use debt to acquire REITs and the interest paid should be

deductible in the production of income as treasury see the dividend as “rental” in essence Foreign Investor

• Will be liable to pay dividend withholding tax at 15% post 1 January 2014 or

the relevant rate set in the applicable double tax agreement

REMAINING REITs TAX ITEMS FOR ATTENTION

28

• Disposal - <20% of holdings in property companies
• Depreciation of leasehold improvements and machinery and equipment
• Property company liquidations
• Inwardly listed property companies and foreign REIT income
• “Saving incentive”
• Unlisted property companies

29

SECTOR UPDATE

• Office
• Industrial
• Hotel

FUNDAMENTALS

30

RETAIL: OUR SHOPPER

31

Upper Income Shopper - Solid

• High debt levels but mainly limited to asset finance and has experience on how to manage debt.
• High employment levels with relative strong growth in income
• Appreciating assets

But,

• Negative sentiment on future – Rand collapse, politics, government, labour
• Increasing interest rates
• Erosion of disposable Income : - education, medical costs, tolls, indirect taxes

Middle and Lower Income Shoppers - Fragile

• Costs of upward mobility – schooling, utilities, transport, peer group pressure
• High delinquencies (arrears of 30 days or more) and impairments
• Unsecured lending freeze
• No new grants and sub-inflation growth of existing grants
• Unemployment / strikes – direct impact and ubuntu

PORTFOLIO TRADING PERFORMANCE

32

TRADING DENSITY AND COST OF OCCUPATION RATIOS

Average Trading Densirty (12 months) % Gross Rent to

• Ave. T/O (12

month) Average Trading Densirty (12 months) % Gross Rent to

• Ave. T/O (12

month) Brooklyn Mall 2,982 8.0% 3,116 10.3% Lakeside Mall 2,095 6.8% 2,117 9.6% Alberton City 2,088 7.5% 2,051 10.5% River Square 1,997 5.8% 2,275 7.7% Hatfield Plaza 2,246 7.6% 2,203 10.0% Waterfall Mall Rustenburg 2,758 6.9% 2,984 9.1% Woodmead Retail Park 2,835 5.0% 2,212 10.1% City Mall 2,083 6.9% 2,127 7.8% The Constantia Village 5,970 4.4% 5,530 9.8% La Lucia Mall 2,793 7.3% 2,635 11.3% Walmer Park 2,579 6.3% 2,893 7.9% Longbeach Mall 2,872 4.3% 2,046 8.9% City View 1,705 6.3% 1,329 10.5% Golden Acre 2,593 9.1% 2,593 9.1% Northgate 1,654 10.0% 1,818 13.8% Kolonnade Shopping Centre 2,828 6.3% 2,702 8.5% Total Retail Portfolio 2,517 6.8% 2,444 9.8% Including Anchor Tenants Excluding Anchor Tenants Growthpoint Malls

RETAIL CATEGORY TRADING PERFORMANCE

33

Retail Category Sept – 14 T/D Average T/D (12 month) % Gross Rent to

• Ave. T/O

(12 month) Food – Supermarkets 2,648 2,549 2.33% Credit Fashion 2,057 2,173 8.03% Value Fashion 2,308 2,621 7.17% Sporting Goods and Wear 1,825 1,915 9.00% Department Stores 2,191 2,379 2.53%

RETAIL: FOOTCOUNT / SQM

5 10 15 20 25 30 12 13 14 14 12 13 15 28 11 12 14 17 26 9

Oct-12 - Sep-13 Average Oct-13 - Sep-14 Average

34

INDUSTRY ISSUES AND TRENDS

INDUSTRY ISSUES

36

• Rates and Taxes
• Government

 Local  National

• Legislation and Regulation
• Lack of investment opportunities
• Growth in the economy
• Over renting
• Change in office layouts
• Online shopping
• Green buildings
• Empowerment

FUTURE TRENDS

37

• Less capital
• More expensive capital
• Consolidations
• Continued pressure on institutional property owners for liquidity
• Development exposure
• Sustainable buildings & Electricity generation
• Emerging Africa
• Bigger, more transparent sector

Thank you