Page 134 - Profile's Unit Trusts and Collective Investments 2021 issue 2

CHAPTER 7

performance fees, and in a few cases these performance fees are uncapped. Even capped fees –
because the cap is usually a fixed percentage (eg, 2%) – can be a sizeable penalty for investors where
market or sector performance is in single digits.
Another possible fee, though not common in SA, is the exit charge, designed to encourage
unitholders to stay invested. Typically, funds with exit charges have low entry costs, but penalise
investors who withdraw early. So a fund might charge a 5% exit fee if you withdraw in the first
year; 3% in the second; 1.5% in the third; and no exit fee thereafter.
Property Funds
Property investment offers a solution to those investors requiring a high income yield and a
refuge from the volatitility of the stock exchange. Investors are faced with a number of options
when it comes to property funds and it is important to understand the differences between the
types of funds:
The ASISA Real Estate sector – the funds you would find under “Unit Trusts” in a
newspaper’s price pages – contains open-ended unit trusts (UTREFs) that, just like other
equity funds, buy shares – but only shares in listed property entities.
The JSE’s Real Estate sector contains companies and shares that invest or manage property
assets. Confusingly, this includes closed-ended REIT CISs (also referred to as Trust REITs),
previously known as PUTs .
In simple terms, Trust REITs own physical buildings, real estate unit trusts own shares in
listed property companies. By buying shares in a REIT, the investor is effectively buying a stake in a
range of buildings owned by a management company. REITs differ from UTREFs in that they are
“closed ended” and there is no obligation for the fund managers to repurchase units from
unitholders. Both options allow investors to share in professionally managed property portfolios
without any of the disadvantages of direct property ownership.
The subject of property investment generally elicits strong views – there are analysts with firm
opinions both for and against. The traditional view argues that a portfolio should be balanced
across cash (no risk), equities (for capital growth) and property (low risk and potential capital
growth). Advocates of property investment maintain that property, and particularly property unit
trusts, offer a secure, low-risk investment that still offers upside potential (ie, prospects of capital
growth). A contrary opinion would point out that while investment in property has always been an
excellent hedge, the arrival of derivatives has given institutions an alternative means of hedging.
There is little doubt, however, that property is an appropriate investment for certain investors.
Real Estate Unit Trust Funds (UTREFs) and Real Estate Investment
Trusts (REITs)
As mentioned above, investors interested in property are faced with two main options: Real Estate
Unit Trust Funds (UTREFs) and Real Estate Investment Trusts (REITs). Confusingly, most REITs are
not trusts at all, but companies, and most funds in the ASISA Real Estate sector are unit trusts. We use
“UTREFs” in this section to refer to real estate unit trusts, and “REITs” to refer to JSE-listed property
owning companies. (To further confuse matters, there are other JSE listed property companies, known
as Real Estate Development & Services companies,orREDS, whichare neitherCISs orREITs –
businesses involved in property trading, leasing, or general property services.)
There are two types of REITs: Corporate REITs (structured as companies), and Trust REITs
(also known as REIT Collective Investment Schemes, or REIT CISs). The latter are both
CISCA-registered and JSE-listed entities. Trust REITs (REIT CISs) were previously known as
Property Unit Trusts (PUTs).
The term REIT is used to denote a particular tax structure in terms of which income and tax lia-
bilities are passed on to shareholders and unitholders. A property entity that falls under the REIT
tax structure does not pay tax (provided it adheres to the REIT rules), instead tax is paid in the
hands of the unitholders or shareholders (depending on the type of entity).
Almost all of the JSE listings in the Real Estate sector are Corporate REITs and not REIT
Trusts. (Note that the arrangement of JSE sectors does not make it possible to differentiate Trust

132 Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts