The impact of South African real estate investment trust legislation on firm growth and firm value

Abstract

Background: Through the introduction of the South African real estate investment trust (SA REIT) structure, listed property investment firms are required to conform to international REIT standards, thereby making REITs more attractive to investors. Despite the exponential growth of the SA REIT industry over the past decade, SA REIT legislation – effective from 2013 – has imposed regulations with regard to financial leverage and profit retention, which may affect these firms’ sustainable growth rate and firm value.

Aim: By deconstructing the sustainable growth rate, we investigated the potential impact of SA REIT legislation on growth rate components and considered the impact of each growth component on firm value.

Setting: The introduction of SA REIT legislation provides an opportunity to investigate how regulation has affected REIT growth and value.

Methods: We investigated changes in the respective sustainable growth rate components using a mixed model analysis of variance. Additionally, we employed a panel regression to assess the impact of each component on firm value (proxied by Tobin Q).

Results: We found empirical evidence of decreased leverage and profit retention, as well as increased profit margins, in the REIT period, which may be indicative of firms’ reaction to regulation. In addition, we found that profit retention had a significant positive impact on firm value, while leverage showed a significant negative effect on firm value post-legislation.

Conclusion: This study confirmed a significant change in growth components, with higher average profitability and sustainable growth in the REIT period, suggesting that the REIT industry responded positively to the REIT regime introduction.