The US continues to see the diversification of its REITS sector. South African REIT watchers are viewing US REITs with interest as their own country saw laws changing this year that are freeing-up the market.
Businesses aim to enhance shareholder value by taking advantage of REITs’ favourable tax treatment. Timber and cell phone companies have already established REITs. Other non-traditional real estate companies, ranging from riverboat casinos to sports arenas and prisons, are also considering the REIT format. Among the emerging subsectors are billboard REITs, which are expected to debut in early 2014.
You may ask how billboards qualify as a REIT? As it turns out the infamous US tax department, the IRS, has relaxed REIT rules by widening the definition of what constitutes “real” property, which is eligible for REIT status, versus personal property, which is not eligible for REIT status. Prior to recent years, the IRS considered whether structures were physically moveable. Recently, however, the IRS has shifted its view to consider the owner’s intent for a structure. Therefore, if owners intend for structures to be permanent, like billboards or cell phone towers, the companies can now qualify for tax treatment that is appropriate for real property, making them eligible for REIT status.
Quite how the South African players will manipulate the market when the new REIT structure will come about this year is hard to tell but it may be worth watching how the US trends play out. The case in point is an arguably obscure Billboard REIT.
There are just a handful of players in the US billboard markets.
– CBS Outdoor America is to be converted to a REIT. The plan is to sell outdoor operations in Europe and Asia. Analysts value the business at $4-6 billion. Upon IRS approval the REIT conversion should be up and running by 2014.
– Louisiana-based Lamar Advertising, with a market cap of $4Billion has announced plans to pursue REIT status.
– Clear Channel Outdoor, the second largest firm in outdoor advertising in the world, reported that they have no current plans to convert to a REIT.
But alas, the billboard REIT subsector is considered to be looking at very modest growth over the next few years. Any growth that is forthcoming is likely to come from acquisitions, given the fragmented nature of the industry and hence the scope for consolidation.
Another challenge faced by billboard REITS is that of rents which are exceptionally dependent on the health of the economy. In difficult economic times, it is easy to pull back on billboard advertising.
On the up-side, growth is expected from digital billboards and posters, with higher rents as they become more commonplace. Digital displays allow advertisers to change their messaging more often, allowing them to target demographically at different time periods. Wifi technology also enables advertisers to send ads from billboards to mobile phones adding further flexibility.
The IRS has ruled that billboards qualify as real property. Specialized REITs have been very popular in recent years, but in the crowded REIT space, it remains to be seen if this new property class with modest organic growth prospects will pique the interest of US investors. Whether South Africa will see this same rush to ’REITise’ every industry remains to be seen. If all the property companies currently listed on the JSE adopt the REIT structure, South Africa will boast the eighth largest REIT market in the world.