Structuring the investment
Financing of, and the acquisition of large real estate portfolios or companies holding real estate, varies depending on the value of the transaction and the parties involved. Most acquisition financed and re-financing is done with institutional banks. REITS and other institutional investors such as listed property funds, banks, pension funds and insurance companies mostly fund their own acquisitions.
Recently, based on long-term strategy, many large corporations have decided to focus on their core business rather than manage a large property portfolio in addition thereto. This gave rise to a number of joint venture structures whereby the corporations dispose of their property portfolios to special purpose vehicle (SPV) companies, or to listed property funds, and then enter into lease arrangements in respect of such properties, thereby generating an immediate cash injection, while at the same time not affecting operations. In many instances, the corporations decide to retain a stake in the SPV company so as to not miss out totally on the upside if the property portfolio is disposed of in future.
It must be said though, that deciding on the structure is heavily dependent on tax structuring and a 'one size fits all' approach must be avoided.
Non-residents may only borrow up to the value of the equity they inject into the property (i.e., half of the value can be financed, and half must be equity). The National Credit Act protects primarily individual persons who are borrowers against unscrupulous lending practices.
Lenders providing finance usually require security packages consisting of one or more of the following forms of security:
- mortgage bonds over the immovable property;
- suretyship or guarantee by parent company or directors, or even shareholders;
- notarial bonds (both general and special in nature over movable property such as plant and equipment);
- cession of rental income and any other proceeds derived from the property; or
- pledge of shares in the property owning entity.
In addition to security packages, lenders usually require a portion of the acquisition to be equity funded, the percentage varying depending of the nature of the property or the project.
At present there are no restrictions on foreign ownership or occupation but as stated previously there is currently a constitutional review process underway, which may result in recommendations as to how tenure may be enjoyed by foreigners and whether different ownership structures (e.g., leasehold as an alternative to freehold) should be introduced. As part of the same discussion, the government also previously mooted introducing maximum land areas that can be owned by one individual or entity, but no draft bills have been tabled for comment.
There are formal requirements for a foreign company to register under the Companies Act, 2008 if it wishes to acquire immovable property in South Africa. Ownership of shares by a foreign person in a local entity that owns real property is also permitted, subject to certain tax implications relating to withholding tax, capital gains tax and exchange control.