Budget aids real estate unit trusts, writes Isaac Moledi

Investing in property unit trusts is set to become more attractive after Finance Minister Trevor Manuel's budget speech last month, property analysts say.

Craig Hallowes, spokesman for the Association of Property Unit Trusts, believes that listed property in particular is likely to become more attractive to retirement fund asset managers.

Hallowes says many of the institutional asset management companies do not invest funds that they manage in direct property, but rather acquire exposure to the industry by way of listed property. Property analysts say this will now be possible.

Before the Budget, property unit trusts (PUTs) income was treated as interest and was taxable.

But experts say for Manuel to raise the exemption for interest income to R18 000, from R16 500, for people younger than 65, and to R26000, from R24500, for people 65 and older means that an investor younger than 65, at a yield of 7percent, can own more than R257000 worth of the PUTs before the income becomes taxable.

Though this will indirectly affect PUTs, Macquarie First South property analyst, Leon Allison, says the introduction of depreciation on commercial buildings will go a long way in making the industry more attractive.

The Income Tax Act already provides for depreciation on buildings used for manufacturing and similar processes, but does not allow for tax depreciation on certain buildings.

Allison says: "The treasury intends to introduce a 5percent a year depreciation allowance for the economic wear-and-tear of newly constructed commercial buildings and upgrades - in effect a write-off period of 20 years."

He says this will benefit tax-paying landlords and result in a better after-tax yield for the industry.

This, in turn, will make the industry more attractive for companies to own their own properties rather than to sell them to listed funds that are not directly affected by the allow- ance because they do not pay tax.

Allison says though this is likely to make the properties marginally more expensive to buy, the PUTs are likely to get a marginally better price if the property is sold to a tax-paying entity.

The budget also proposed the abolition of stamp duty on short-term leases of less than five years. While the duty is generally paid by tenants, Allison says this move will help simplify the letting process.

"Though the overall impact of the changes is not massive, they could lead to a small increase in the value of commercial property."

Before the budget, retirement funds tax was payable only on interest and rental income, making investment in property and interest-bearing instruments less attractive to the industry.

Allison says the abolition of the tax from the beginning of this month should make the retirement fund industry even more keen to do so, which should flow through to higher PUT prices.