The portfolio includes listed Real Estate Investment Trusts (REITs). These REITs are readily traded and sold on first world stock exchanges and hence provide reasonable liquidity for redemption requests. The cash and REITs provide liquidity, with cash managed to reasonable working capital levels to avoid unnecessary yield dilution.
FWHRE invests approximately 75% of its portfolio in direct real estate which can only be realised in the medium to long term. Whilst the Fund also invests in listed REIT's to provide a reasonable level of liquidity, in certain circumstances it may be appropriate to limit redemptions to ensure the interests of existing shareholders are protected at all times. Consequently, the Offering Document allows the manager to limit the weekly redemptions to a maximum of 5% of the Fund, and also allows for the suspension of all redemptions where, at the discretion of the manager, it is considered to be in the best interests of investors. For further information, please refer to the Offering Document.
FWHRE property investment criteria should enhance the reliable and predictable nature of the income stream and because the direct real estate will be revalued twice annually on a rolling property basis, price volatility is likely to remain low.
Adjusting asset allocation to take advantage of the higher yields in either direct or listed real estate as listed prices move between premiums and discounts to net asset value, will enhance the investor's overall return.
A portion of the direct real estate is financed by debt resulting in positive leveraging due to the differential between the cost of financing (currently under 3%) and the yields offered by direct real estate. This enhances the yield of the portfolio. FWHRE limits debt to 50% of the cost of the direct real estate on acquisition. Including the listed REITs and cash, the leverage position is lower than 50% overall. FWHRE can manage the interest rate risk by potentially reducing the over debt ratio and/or taking out interest rate swaps to fix a portion of the interest charge, thereby enhancing the predictability of the income yield for investors.
Without any price appreciation, the investor may achieve a return of approximately 4.5% per annum as a result of the dividend yield (before fees). The quality of the real estate and the tenants will ensure this outcome can be anticipated with a reasonable degree of certainty.
Where investors have reached their foreign investment allowance limit they can utilise Marriott's asset swap capacity to invest in FWHRE. This facility is also available to trusts and companies wishing to invest into FWHRE.
Marriott recommends the use of either a death bed donation and/or a joint account. A death bed donation takes effect on the day preceding the death of the investor and is the legal mechanism for transferring ownership to surviving beneficiaries. As the investment is no longer owned by the original investor on the day of their death, the investment will not form part of an offshore estate for probate purposes.
From a South African tax perspective death bed donations are deemed to be dutiable property of the deceased estate* and therefore still attract estate duty. To avoid double taxation, however, they are excluded from donations tax**.
* in terms of Section 3(3)(b) of the South Africa Estate Duty Act ** in terms of section 56(1) of the South African Income Tax Act
An investor may elect to open a joint account with another investor. In the event of the death of one joint holder, the whole of the portfolio will automatically vest in the joint surviving holder or holders. If a joint account investor elects a death bed donation, the donation has precedence and the investor will be deemed to have donated their investment the day before their death. The investor's portion of the joint account will therefore be transferred to the listed beneficiaries effective the day before their death.
Joint accounts and death bed donations can be elected in the Investment Mandate. Investors are encouraged to seek independent tax advice suitable to their personal circumstances.
SARS permits an annual foreign investment allowance of R10 million for individuals, and an annual discretionary allowance of R1 million per year. The latter does not require a tax clearance certificate.
If you have reached your individual limit for the year then you can make use of the Marriott asset swap capacity at no extra cost. Please contact the Communication Centre for more details.
The income received from FWHRE is considered a foreign dividend by the South African Revenue Service and as such is taxed at a maximum 20%. This is in most cases significantly lower than the marginal rates an investor would have to pay on local real estate income.
Non-UK residents may be subject to UK capital gains tax on gains arising from a redemption of shares in the Fund. Individual investors will benefit from annual individual UK CGT tax allowances and where applicable will also be able to take advantage of specific Double Tax Agreements in place between the UK and their respective country of residence. This will also impact trusts and corporate investors.