Five weeks after Treasury extended REIT tax treatment to institutionally owned property companies, RisCura asked the unlisted property managers it monitors how they intend to respond. Most want the benefit; fewer than half can reach it.
Since 19 August, an unlisted property company wholly owned by retirement funds, insurers, listed REITs, or Schedule 3B state entities has been able to claim the same tax treatment as a listed REIT under section 25BB of the Income Tax Act. Distributions become deductible, rental income is taxed in the investor’s hands rather than the company’s, and for a tax-exempt pension fund the leakage created by section 23M’s limits on interest deductions falls away. For retirement funds that have long held unlisted property at a tax disadvantage to their listed peers, the change is overdue and welcome.
Whether it changes much in practice depends on the managers rather than on Treasury, and so in September RisCura asked a combination of the established and emerging unlisted property managers it monitors on behalf of retirement fund clients how they intend to respond. Nine of the 12 managers surveyed replied between 8 and 21 September, three to five weeks after the rules took effect. The sample is small and we coded the written answers into themes ourselves, so the figures are indicative. They are, however, the decisions that will determine what reaches pension portfolios.
The headline finding is that only two of the nine managers currently intend to pursue unlisted REIT status, one by converting an existing pooled fund and the other by applying once the detailed requirements are published. A further two would like to follow but are prevented by the ownership rules, which require 100% of the equity to be held by qualifying institutions. Typical institutional unlisted investment vehicles would require managers to have a sharing interest in the vehicle to promote alignment of interest. This requirement ultimately limits the ability for managers to pursue the unlisted REIT status. The remaining managers either plan to reassess once the framework settles, have concluded that the cost of converting outweighs the benefit, or hold debt rather than property and have nothing to convert.
The ownership test emerged as the principal barrier to wider adoption, named by five of the nine respondents. During consultation the industry argued for a 75% threshold that would have accommodated manager co-investment and empowerment partners, and Treasury rejected it in the final rules. Managers report that a de minimis carve-out has been accepted in principle, but none expects relief before 2027. The result, for now, is that some of the funds with the strongest transformation credentials are among those excluded from a regime intended to draw pension capital into the real economy.
None of this dims the appetite for the benefit itself. Every manager who named an advantage named tax neutrality, and with it parity with listed REITs on after-tax returns; one estimates the uplift for pension fund investors at between 1.5% and 2% a year. Five of the nine expect demand for qualifying unlisted property funds to increase over the next three to five years as the framework becomes better understood and the first conversions are completed, while three are undecided and one expects no change. Our own reading is that the direction is clear even if the timing is not.
For retirement fund investors the implications are practical. Qualifying pooled funds should deliver after-tax returns closer to those of listed REITs, which strengthens the long-standing case for unlisted property as a liability-matching asset without the share-price volatility of its listed counterpart. Trustees should also expect some restructuring below investor level: several managers told us that segregated mandates may be folded into pooled vehicles in order to qualify, with consequences for governance and liquidity that are better understood in advance. The immediate task for investment committees is to ask each unlisted property manager in the portfolio whether it is eligible, what conversion will cost, and when it will happen. The answers will vary more than most expect, and the funds that cannot qualify are not necessarily the weaker ones. What is key is that this provision would not apply to all unlisted property portfolios. A large portion of the universe is focused on gaining growth assets, such as property developments, rather than income distributions from rental stock. Investors will also need to weigh up the trade-off. Committing an unlisted portfolio to high, fixed distributions leaves less capital to reinvest, and that has a cost when attractive growth assets come along.
Managers, for their part, want more from Treasury and SARS before they can plan with confidence. Six of the nine asked for a published application process with a named regulator behind it, worked examples of the key definitions, and a more flexible ownership test. How SARS handles the first application, and whether the 2027 amendment cycle delivers a workable threshold, will determine whether the regime becomes a mainstream route for pension capital into property or remains a niche for the few structures that happened to fit.
Treasury has built a sound regime with a narrow entrance. Retirement funds should use it where they can, and keep making the case for widening it where they cannot.
