THE GREAT REET HEIST- How JSE REITs are posing as legitimate Ponzi schemes

By Japhta Mamalema

29 January 2020

This is Part 1 of 2.

Part 2 released on Monday 10 February 2020.


Source: Lonelyplanet

Real Estate Investment Trusts (REITs) debuted on the JSE on 1 May 2013.

They have holdings in malls and offices which they lease out for rentals.

Buying shares in a REITs is recommended over purchasing a piece of real estate as they:

  • Provide stable dividends, and
  • Avoid transfer fees associated and are more liquid.

Seeing that REITs stocks took a beating from the beginning of 2018;

We thought that we should look at a few REITs and whether their fundamentals make current prices attractive.

Chart: SA listed property index showing the drop in SA-listed property stocks (January 2018-2020)


What we did

We selected the following REITs

  • Accelerate Property Fund Ltd
  • Equites Property Fund Ltd
  • Growthpoint Properties Limited
  • Redefine Properties Ltd
  • Stor-Age Property REIT Ltd
  • Texton Property Fund Ltd
  • Tower Property Fund Ltd
  • Vukile Property Fund Ltd

Representing R185 billions of listed REIT market capitalization and two of the largest in Growthpoint and Redefine properties.

We examined their cash flows starting from the end of the 1st period they started being a REIT to the latest 12 months audited financials.

  • Looking at what they have generated from their operations (excluding working capital),
  • Not considering interest income as it fluctuates with cash holdings,
  • The purchasing and disposal of investment property (including subsidiaries that held investment property) and
  • Their financing and debt levels.


Minsky’s theory of financial instability recognises 3 stages of borrowing in an economy:

1. Hedge borrowing- where assets generate enough cash to meet both the interest and principal repayment requirements.
2. Speculative borrowing-where assets can only generate enough cash to meet the interest repayment requirements.
3. Ponzi borrowing-assets cannot meet the interest nor capital repayment requirements.

Hedge borrowing occurs soon after economic downturn when pessimism is high and lenders are very cautious..

Speculative borrowing shows up during upturns in the economy when asset prices rise and the banks are happy to take that as security.

Ponzi borrowing occurs at the peak of an economic cycle when asset prices are at their highest levels and it seems that they can only continue going up.

“As confidence rises in an economy,

Banks begin to make loans in which the borrower can only afford to pay the interest.

Usually this loan is against an asset which is rising in value.

Finally, when the previous crisis is a distant memory, we reach the final stage - Ponzi finance.

At this point banks make loans to firms and households that can afford to pay neither the interest nor the principal.

Again this is underpinned by a belief that asset prices will rise.” (BBC, 2014)


Summary of findings

 For the detailed findings per company, please see this PDF appendix.

  • Majority of REITs are paying out dividends that they cannot afford.     
          I.e. dividends paid exceed the cash generated from their rental business.

         These expensive Dividends are financed through borrowings, equity issues and to a small extent disposals of property.

         Majority of REITs seem determined to maintain or grow dividends on a per share basis year on year.


          Since the majority issues shares and debt to build their property portfolios and pay dividends and purchase property;

          More debt/equity need to be raised in the following year to maintain dividends in the following year.

  • There is high activity in buying and selling properties.

         REITs spend hundreds of millions of rands every year purchasing properties.

         There is an-almost insatiable need to buy and buy more.

         This is also financed through debt, equity and to a smaller extent, property disposals.

  • Majority of REITs have had their debt ballooning up in recent year


How did we get here?

Charles Prince, former CEO of Citigroup famously said in July 2007 (when subprime mortgage lending was at its peak),

                                          “When the music stops, in terms of liquidity, things will be complicated.

                            But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

REITs are loading up on debt and issuing shares as public interest is favourable.

Fund managers are pouring-in money into REITs,

Analysts recommend that property should form part of one’s portfolio and

The South African Reserve Bank has recently lowered the Repo rate and the cost of credit.

Commercial property valuations have been on the up in the past few years.

A majority of REITs have adopted fair value accounting which requires annual valuations of properties.

Under the JSE listing requirements:

REITs need to maintain maximum debt to Gross assets ratios of 40%.

Fair value accounting can be used to write-up asset values while debt is shown at historical values.

Consider the following Example- Investment properties fair value accounting.

A property costingR10 million is financed 50% with debt.

If valuedat R12 million,

 Accounting rules require the recognition of a profit of R2 million and write up of the value of the property to R12 million.

The debt ratio (which was previously 50%) now stands and looks better at 42%.

If the valuation goes up annually,

Over-time the debt can be made to look insignificant.

The above factors among others, have led to REITs as popular form of putting money in.




Where we are possibly headed to from here...

Current REIT behaviour suggests speculative borrowing under Minsky’s theory of financial instability.

Companies seem content to be doing the bare minimum;

After paying interest on loans,

The rest of the money goes to dividends.

The debt on property purchases has no prospect of being repaid out of cash from operations.

Part of banks’ rationale in lending to REITs is that property prices will keep rising.

Despite this,

A drop in property prices could be disastrous.

REITs will be forced to write-down property values.

Wemight see breaching of debt covenants and listing regulations.

Much more worse is the selling of properties at depressed prices to try and bring down debt,

Like what Rebosis REIT is doing currently.

REITs entice people to buy shares with the promise of regular dividends, efficiency and higher liquidity than real estate.

Our examination shows that some REITS do not generate enough income from their rental business to maintain current dividend levels.

In order to afford dividends, they have to lend and issue more shares.

This issuing of more shares in a certain year increases the cash required to meet dividends in the following year,

Leading to more borrowing and equity issues in the following year so as to maintain the dividends on a per share basis.

This makes REITs appear as highly-regulated Ponzi schemes as they lure people in with the promise of stable income but need new financers to keep their promises.

The music will stop playing at some point.


The story of Rebosis

Rebosis (also a JSE REIT) racked-up debt on a buying spree which stretched to property in the UK.

After Brexit unfolded;

 Property prices slumped and vacancies rose.

Rebosis needed cash fast to keep afloat and had to fire-sell its best South African properties.

The Rebosis stock is currently 96% down from its 2015 highs.

A SENS release on 20 January 2020 indicated that the company is looking to offload student-accommodation properties in Mafikeng to raise capital to reduce debt.

Talks are also ongoing with Delta Property Fund on a merger.

Rebosis stock price (2015-2019)