Page 134 - Profile's Unit Trusts & Collective Investments - September 2025

Chapter 7 Understanding asset allocation

REIT fund managers are limited to investing in properties. If they have surplus cash, they are
allowed to invest in interest bearing investments. Fund managers of UTREFs must invest at least
80% of the market value of their portfolios in REITs, other UTREFs and other property shares
(such as property development companies). They can invest up to 10% of their portfolios in
related businesses.
Because there are no guaranteed buyers for REITs, they can be sold for less than their true value
(NAV or net asset value). In other words, the purchase price of the REIT might be less than the
unit value of the underlying property holdings. This is also true of any other share traded on the
JSE. UTREFs, like other collective investment schemes, are always bought and redeemed at
the NAV price.
REITs may borrow up to 60%, subject to the provisions of the deed, for acquisitions or refurbishing
properties that they have bought for their portfolio. UTREFs may not take on debt. This contrasts
with private property syndicates or investment trusts that can borrow as much as they like
to fund acquisitions.
Costs of investing in REITs
REITs are bought and sold through a stockbroker, who takes a commission on the purchase value
of the investment (between 0.3% and 1.5%). The only other costs are securities transfer tax (STT) of
0.25%, payable to the government, STRATE fees of 0.005787% and a small protection levy (these
fees are payable on all JSE equity transactions).
Income tax
The income from a REIT is usually paid out every six months in the form of a distribution.
Currently distributions from REITs are treated as taxable income in the hands of investors. In terms
of section 25BB, an amendment to the tax legislation, distributions are characterised as “taxable
dividends” rather than interest. DWT does not apply to REIT distributions. Most Real Estate Unit
Trusts (UTREFs) pay out income on a quarterly basis. The tax treatment of a UTREF’s distributions
depends on the shares held by the UTREF – distributions may include a dividend portion (taxed at
source under DWT) if the UTREF holds shares other than REITs, but most income from a UTREF
will be taxable in the hands of the investor.
Derivatives
Derivatives are not an asset class per se, but their increasing use within collective investment
schemes – especially as building blocks for hedge funds – means they require some explanation.
A derivative instrument is one “derived” from (or based on) another. Derivatives, which include
(amongst others) warrants, futures and options, are therefore instruments which are linked to other
assets, and which have no value without the existence of the other assets. Put simply, shares have
value in their own right, but an option on a share has no value if the share ceases to exist.
The popularity of derivatives stems from three main factors. Firstly, they allow traders and asset
managers to make profits when markets are falling as easily as when markets are rising. Secondly,
they enable asset managers to hedge positions in physical assets. Thirdly, they are generally cheap
and easy to trade.
Managers of collective investment schemes are permitted to use derivatives subject to certain
limits. The rules are complex and vary according to the type of fund. Hedge funds, for example,
can use derivatives more extensively than other collective investment schemes. Fund managers
of non-hedge funds are restricted to using derivatives for hedging or, to a limited degree, extending
existing long positions. Short exposure cannot exceed long positions. Long positions effected
with derivatives cannot exceed the value of the portfolio, which effectively limits cash in margin
accounts to (at most) around 10% of a unit trust’s assets. Hedge funds, on the other hand, can use
derivatives to create net short positions (ie, to profit from falling markets) or to gear up portfolios
(ie, to increase long exposure beyond the value of the portfolio’s assets). Managers of non-hedge
funds may not write options, and the CISCA subordinate rules prevent managers from using the
leverage properties of derivatives to gear up a portfolio (ie, to increase long exposure). This does not
apply to hedge funds, although even hedge funds are precluded from taking naked short positions.

132 Profile’s Unit Trusts & Collective Investments September 2025