Real Estate Investment Trusts (REITs) are an internationally recognized investment vehicle which allows an investor to invest in immovable property and receive income from it. REITs as regulated investment vehicles were introduced in 2019 to enable collective investment in real estate. REITs are regulated by Securities and Exchange Commission of Zimbabwe in terms of the Securities and Exchange Act (Ch 24:25), Collective Investments Act (Collective Investment Schemes (Internal Schemes) Regulations, 1998 Statutory Instrument 172 of 1998) as amended by Statutory Instrument 240 of 2019 and the Income Tax Act (Ch 23:06).
Collective Investment Schemes Act [Chapter 24:19]
The Collective Investment Schemes Act regulates the registration and operation of REITs in Zimbabwe. Section 6 of the Collective Investment Schemes Act provides that collective investment schemes may be registered in 3 categories, that is internal schemes, external schemes and professional schemes. Internal schemes are those registered in Zimbabwe in terms of section 10 of the Act and external schemes are those registered outside Zimbabwe and operates in terms of section 19. REITs are registered as internal schemes in terms of Statutory Instrument 240 of 2019.
In terms of section 7, registration is done through an application to the CEO of the Securities and Exchange Commission accompanied by a trust deed, prospectus or advertisement issued or to be issued, payment of the prescribed fee and any other document which may be prescribed by the CEO. After such application, the CEO shall issue his decision within three months of receiving the application and the accompanying documents.
Collective Investment Schemes (Internal Schemes) Regulations.
Statutory Instrument 240 of 2019 which came into effect in November 2019 establishes real estate investments schemes in Zimbabwe as below;
Section 2 “real estate investment trust scheme”
Means an internal scheme that owns, manages or invests in real estate.
Section 3 of the regulations makes provision for the registerable classes of internal schemes and provides as below in subsection (h).
The following classes of internal schemes shall be registerable for the process of section 6 of the Act (h) a real estate investment trust scheme.
Section 4 of the regulations – Registration of Internal Schemes
This section makes provision for the registration process and forms to be used as set out in section 7 of the Act (FORM C151).This application is made by a Trustee or Manager and is accompanied by a copy of the Scheme’s Trust Deed and prescribed fee. The prescribed fee is presently set out in section 2 of the Collective Investment Schemes (Fees). Rules, 2022 Statutory Instruments 215 of 2022.
Internal Scheme Registration Fee.
- In respect of each application for the registration of an internal scheme in terms of Section 4 of the Collective Investment Schemes (Internal Schemes) Regulations,1998 there shall be payable to the Commission, at the time of making the application, a fee of USD $1200.00.
- In respect of each internal scheme registered in terms of subsection (1) the manager shall pay to the commission on or before every anniversary of the registration of the scheme concerned, a fee of USD $100.00 plus 0.5% of the finds under management up to a maximum fee of USD $5000.00.
Section 4 (2) TRUST DEED – as read with Section 11 of the Act.
Section 11 of the Act provides that the Trust Deed must be executed in Zimbabwe and its provisions are binding on the trustee, manager and participants. This section makes provision for the requirements of the Trust Deed which must comply with section 11 of the Act and the applicable requirements of the second schedule. Some of the applicable requirements of the Second Schedule are;
- Nature of participants’ interest in scheme and accumulation units. The Trust Deed must contain a statement describing the interest of every participant in the scheme as constituting in the ownership of one or more units each representing an undivided share in the property of the scheme.
- Issue and Redemption of units – The Trust Deed must contain detailed provisions governing the issue and redemption of units.
- Validation of the property of the scheme – The Trust Deed shall contain detailed provisions governing the valuation of the property of the scheme.
- Investment Powers – The Trust Deed shall specify general powers of investment appropriate to the class of scheme sought to be registered and shall impose such limits and restrictions on the exercise of such powers.
- (12) Audit and Tax – The Trust deed shall require the manager to appoint a public auditor for the scheme.
- Functions of a Manager – The Trust Deed shall contain provisions governing the management of the scheme which includes a duty of the manager to manage the scheme in terms of the Act, the Regulations and the Trust deed. The manager will be required to make decisions as to investments in line with the objectives of the scheme.
- Functions of a Trustee – The trust deed shall contain detailed provisions governing the functions of the trustee including defining the trustee as custodian of the property of the scheme and requiring it to take reasonable care to ensure the manager manages the scheme in accordance with the Act, the Regulations and the Trust Deed.
Alteration or amendment of any of the provisions of the Trust Deed ought to be approved by the Chief Executive Officer and meet any prescribed requirements before they can be of effect. Amendment to the Trust Deed in terms of the Regulations is effected by a supplemental deed executed by the trustee and manager of the REIT and approved by the Chief Executive Officer of the Commission in terms of section 9 of the Regulations.
Trustees & Managers
Section 12 of the Collective Investment Schemes Act provides that only a company registered and one resident in Zimbabwe can be licensed to be a Manager or Trustee. The Manager and Trustee of an internal Scheme shall be separate companies and under separate control. The manager of the trust is responsible for its general administration in conforming with the Act, the Regulations and the Trust. The Trustee on the other hand is the custodian of the property of the REIT and holds the manager accountable for the administration of the REIT. Operating as a Trustee or Manager of a REIT without a license amounts to an offense attracting a fine not exceeding level fourteen or imprisonment for a period not exceeding five years.
Application for licensing of Trustees and Managers
Section 6 of the Regulations provides for the procedure for licensing of Trustees and Managers. An Application is made to the CEO of the Commission accompanied by such reports, accounts and any other information the CEO requires relating to the last three financial years of the applicant immediately preceding the application. The application is also made with proof of payment of the prescribed fee. For the application to be granted, the CEO considers whether the applicant, its directors and interest holders are fit and proper to manage or act as trustee of the REIT. A fit and proper person in terms of section 7 of the Regulations is one who has no prior criminal convictions, is honest and reputable in business and is competent to manage or act as trustee of the REIT.
Benefits of REITs
REITs present a number of benefits for investors or participants:
- Because REITs are listed on the stock exchange, the securities are liquidated. They are easy to acquire and dispose without the hurdles associated with the traditional buying and selling of real estate.
- Section 17 of the Finance (No. 2) Amendment Act of 2020 amended the Income Tax Act to include REITS under the Third Schedule (Exemption from Income Tax). This means REITs are exempted from paying corporate income tax and therefore ensures more revenue for the investors.
- In terms of section 22F (b) of the Capital Gains Tax Act [Chapter 23:01] capital gains withholding tax is exempted on the disposal of unit securities by investors. This does not only ensure more revenue but also presents ease of selling and buying of securities within the REITs structure.
- Under section 17 of the Finance (No. 2) Amendment Act 2020, REITs are obliged to distribute 80% of their taxable income to participants in the form of shareholder dividends each financial year.
- REITs are structured in a manner that affords middle income investors access to the real estate industry without requiring the high capital input. The structure also enables variety of real estate enabling investors to have a share in industrial, residential and commercial real estate all at once.
- REITs also present ease of business to investors because they do not have to deal with construction of the premises, maintenance and management of tenants. They get all the benefits of equity investment without the burdens.
For more information and inquiries on Investments, kindly get in touch with our Corporate and Finance Practice Group on info@mmmlawfirm.co.zw
How many real estate investment companies in Zimbabwe, and how many of them are registered on the ZSE?.