Understanding Real Estate Investment Trusts in Zimbabwe
DEFINING REAL ESTATE INVESTMENT TRUSTS (REITs)
Real Estate Investment Trusts (REITs) are regulated investment vehicles that enable collective investment in real estate. Investors pool their funds and invest in a trust that is divided into units, with the intention of earning profits or income from real estate, as beneficiaries of the trust. In other words, a REIT is an investment vehicle that enables the issuer to pool investors’ funds for the purpose of investing in real estate. In exchange the investors receive units in the trust commensurate with their contribution and as beneficiaries of the trust share profits from the real estate assets.
A REIT owns and typically operates income-producing real estate or related assets which may include among others, office buildings, shopping malls, apartments, hotels, resorts and warehouses.
Unlike traditional real estate equities, REITs are mandated to pay almost all income from rentals to investors. The level of distributions to REIT securities holders varies by jurisdiction and the legislation in Zimbabwe stipulates that at least 80% of gross taxable income must be distributed.
History of REITs
The REIT structure was first established in 1960 in the United States and arose in response to problems in the US property market. At the time, banks in the US were finding themselves in the possession of large portfolios of income-producing properties, whose mortgages had not been repaid. In the process of attempting to off-load these properties, the banks found that they were unable to sell them to traditional investors due to the inaccessible nature of large real estate assets. The REIT concept was thus developed as a strategy to “unitize” property and permit collective investment by the average investor, with the aim of providing this average investor a way to participate in the property market.
Other countries followed suit, with Australia listing the first property trust in 1971, Canada in 1993, while the UK established REITs in 2007. Since 1994, legislation and regulations governing REITs have been introduced in a number of African countries, including Ghana, Tanzania, Nigeria, South Africa, Kenya, Rwanda, and Morocco. In South Africa, the institutionalisation of the REITs structure has seen the registration of around 30 REITs since 2013, the emergence of REITs in other African countries has progressed at a slower pace.
The Legal Framework governing REITs in Zimbabwe
In Zimbabwe, REITs are regulated by the Securities and Exchange Commission of Zimbabwe (SECZ) under the Securities and Exchange Act (Chapter 24:25), Collective Investment Schemes Act (Chapter 24:19), Collective Investment Schemes (Internal Schemes) Regulations, 1998, Collective Investment Schemes (Internal Schemes) (Amendment) Regulations 2019 No. 5 and the Income Tax Act (Chapter 23:06).
HOW DO REITs OPERATE? WHO ARE THE KEY PLAYERS AND INSTRUMENTS?
There are several parties involved in the structure of REITs. This is purposely done to improve transparency, accountability and ensure the interests of investors are fully protected. Below is a summary of the various parties.
The Trustee acquires the Property and holds it on behalf of the beneficiaries or investors. The Trustee is responsible for appointing and supervising the Manager. It is also the Trustee’s responsibility to ensure that the assets of the scheme are invested in accordance with the Trust Deed and the Offering Prospectus, and to ensure that distributions from the assets of the REIT are made in accordance with the Prospectus.
In short, the Trustee take legal ownership of the assets in Trust and ensures that the funds contributed are invested in line with the objectives and purpose laid out in the Trust Deed.
The scheme is managed by a Professional Manager who is answerable to the Trustee. The Manager’s duty is to oversee the investment of the assets of the scheme and maintain proper accounting records and other records of the scheme. The Manager also collects rental and other income on behalf of the Trustee. This income is distributed to the investors at the rate agreed upon in the Prospectus or at any other rate as may be agreed between the Trustee, the Manager and the Investors.
This is a document that establishes or sets out the terms, objectives, and the Investment Policy of the REIT. All investments are done in line with the objectives in this document. It is similar to a constitution as it guides the management of the REIT. The trust deed has to be executed by the scheme’s manager and trustee or proposed manager and proposed trustee and must comply with Section 11 of the Collective Investment Schemes Act. The trustee is responsible for implementing the scheme’s investment policies and investment restrictions outlined in the provisions of the trust deed.
The Offering Prospectus
The Offering Prospectus is a document detailing the policies and investment strategies to achieve the REIT’s stated objective, and the investment strategies, including the REIT’s future plans as well as steps taken and the time frame to realise the plans. The prospectus also typically details the types and characteristics of real estate which the REIT will acquire, that is, considerations taken into account in selecting real estate such as location, types of real estate and income/rental prospects; permitted investments and investment limits and restrictions; the policy on borrowing or financing; and the REIT’s level of gearing at the point of listing, including source, type, nature of borrowings or financing and the interest or profit rate payable; distribution policy and mode of distribution to investors; and the investors’ profile most suitable for the REIT.
Securities Exchange Commission of Zimbabwe (SECZ)
This is the government institution that regulates capital markets in Zimbabwe. It licenses, supervises, and monitors activities in the REITs market to ensure that investments are safe.
BENEFITS TO INVESTORS
Investing in REITs offers several benefits to investors. Firstly, REITs present middle-income investors easier access and ownership in the growing real estate sector in a manner that is not as capital intensive as a direct purchase of property. It also offers issuers access to a larger and broader pool of investors and capital depending on how they solicit investment.
The unique structure has the advantage of investing in a variety of real estate such as shopping malls, residential projects and industrial projects. This is possible because a REITs structure affords to unit holders, an avenue to venture into real estate without the constraints and challenges faced in construction, sourcing for capital, managing tenants and buildings maintenance.
Because REITs are listed on the stock exchange, by implication, the structures tend to be liquid, as investors are able to buy or sell units easily in an organized marketplace. This is not particularly the case in the property market where residential or commercial property can stay on the market for years without attracting buyers due to exorbitant pricing.
REITs offer a tax-efficient structure that can enhance operational efficiency and profitability of property enterprises and ventures. Within the Zimbabwean legislative framework, effective 1 January 2021, REITs are exempted from corporate income tax, subject to certain conditions, including;
- in the case of investors other than pension funds, income must accrue from new real estate projects;
- at least 80% of gross income must be received from real estate;
- a minimum of 80% of taxable income must be distributed in the form of shareholder dividends each year;
- there must be a minimum of 100 shareholders after the REITs’ first year of existence; and
- the REIT must be listed on an exchange registered under the Securities and Exchange Act.
In Zimbabwe, REITs are exempt from income tax. REITs security holders pay 1% capital gains withholding tax on disposal of their securities and 10% withholding tax on dividends earned. Further, REITs have a favourable tax regime from both investors’ perspective and also from the REITs’ perspective. This is attractive to real estate equities investors because listed businesses are generally liable to income tax of 25%, and equities investors are liable to a dividend tax of 10% as well as capital gains withholding tax of at least 1.5% when they dispose their securities.
At a macroeconomic level, the introduction of the highly transparent, well-regulated, tax-efficient REIT structure into the real estate sector of Zimbabwe has the potential to stimulate additional capital flows into the country’s property markets, thus positively impacting the job market and business dynamism of the economy. At a microeconomic level, REITs will provide an opportunity for private investors to play a significant role in the provision of the country’s commercial offices, industrial premises, retail real estate, residential units, and healthcare facilities. In other words, the REITs structure has the potential to serve as an effective policy tool for channelling professionally managed capital into the delivery and operation of the property market.