Debt Capital Markets as a Funding Source for Listed Property Funds in South Africa

Property finance in South Africa has traditionally been a market dominated by bank lending. However in the context of the Basel III Accord creating cost and other regulatory implications for bank lending, as well a maturing listed property market adopting international best practise in the form of REIT legislation, debt capital markets funding is becoming a significant component of REITs’ capital structure. The study seeks to determine the merits of this nascent funding source are for REITs in South Africa. With Debt Capital Markets funding now a material contributor to listed property fund capital structures, it is important to assess the impact this funding source has on REITs. Following a review of applicable literature, interviews with senior management of ten listed property funds and other debt capital markets stakeholders were undertaken. Certain advantages and disadvantages of debt capital markets funding, in comparison to other lending sources, were presented as hypotheses to the interviewees. The responses show support from a significant majority of the interviewees for four particular advantages and two disadvantages. The study also finds support for these advantages and disadvantages as being transient and it is advisable for REITs to periodically reassess the respective advantages and disadvantages of this funding source for their business.