If they say why? Tell them that it's human nature


By Japhta Mamalema
10 February 2019

A typical business will from its profits,

Decide whether to pay a dividend, repay debt or reinvest.

JSE REITs operate in different worlds,

They are mandated to pay 75% of their taxable income as dividends;

This leaves little to repay debt and reinvest.

REITs appeal to the public as they produce a stable income and chance for capital appreciation.

A study by us found that JSE REITs are paying out dividends that they cannot afford

I.e. paying out more than their taxable income (see Appendix).

To maintain and grow dividends,

REITs raise debt and new equity.

This in-turn makes REITs resemble a typical Ponzi scheme that need new participants to keep going.

We wanted to understand why REITs carry out business in a manner that we consider reckless;

Borrowing and issuing equity to maintain dividends.

Our hypothesis was to test whether the remuneration policies of REIT executives had a large influence on the direction companies followed.


We examined the remuneration policies of the following companies:

  • Accelerate Property Fund,
  • Equites Property Fund,
  • Growthpoint Properties,
  • Redefine Properties,
  • Stor-age Properties,
  • Texton Property Fund,
  • Tower Property Fund and
  • Vukile Property Fund.

We assessed what made up a significant portion of executives short and long term incentives.

Findings are as follows.

Where a weighting could not be determined, please refer to
Appendix 2 for an extract of the remuneration policy


From the table above,

A large portion of executive’s short and long-term incentives is based on

  • Growing dividends,
  •  Improving loan and other debt matrixes (hedging interest rates, maintaining debt ratings, lowering debt ratios etc.),
  • Property acquisitions and increasing net asset values (primarily through a mix of debt-funded properties and accounting fair value write-ups) and to a small extent
  • Increasing share prices.

The 2008 financial crisis arose from banks using high leverage and unprecedented-high defaulting rates from subprime borrowers.

To raise profits:

Banks granted credit to people who should not have qualified and charged high interest rates.

When high default rates occurred, banks could not pay bills and were brought to their knees.

In the years leading up to 2008

Banks recorded record profits from their lending business and stock prices reached all-time highs.

The initial years of subprime lending experienced low default rates,

With profits on the high, executives were richly rewarded.


When sub-prime borrowers defaulted in high rates, the crisis ensued.

Lehman brothers, Northern Rock, Bear Sterns were among the casualties of the crash.

Shareholders saw their companies file for bankruptcy, bought out cheaply or got wiped clean.

In as much as executives were responsible for the risky business undertakings,

Shareholders also partly to blame for not questioning the risky business models their companies undertook despite it being disclosed in annual reports (Authors opinion).

Reinforcement theory by B.F Skinner argues that people’s actions are driven by possible consequences;

Actions met with positive consequences are more likely to be repeated.

In our case,

REITs takes on more debt, issues new equity annually to purchases properties, pay out more dividends as executives get richly rewarded.

Consider a
 REIT that owns 1 property.
This company will for the most part have its annual income fixed.

Its shareholders will from year to year receive the same dividend per share.

Such a REIT cannot grow dividends by more than its leases escalation rates.

By rewarding higher dividends, purchasing of property and increased net asset values;

Remuneration policies indirectly encourage increased lending and further equity issues rather than promote healthy balance sheets and debt-cutting.

Higher dividends require more properties which can be financed with debt and equity

Issuing more equity requires a higher total dividend payout  to maintain and grow the dividend on a per-share basis.
This is financed with more debt and equity as the cash derived from rentals is not sufficient.


This behaviour cannot go on unchecked and will implode.

We will recommend that shareholders inspect their companies remuneration polices and start considering whether the remuneration policies promote the long term sustainability of the company. TSAI