The future of 12J
With the insecurity in the tourism sector, what is the future of 12J investments?4th Sep 2020
It sounds like a win-win deal: you invest in a small- or medium-sized enterprise (SMME), helping it to grow by increasing its access to equity finance, and in return SARS gives you a handsome tax deduction. From a property investment point of view, many of these 12J enterprises were in the hospitality space, with investors buying into properties that catered to South Africa’s booming tourism industry. Then, in early 2020, COVID-19 struck. Boom turned to bust, leaving investors wondering if there’s any future for 12J.
Overcoming negative sentiment
12J investments are named after Section 12J of South Africa’s Income Tax Act, which was introduced in 2009 with the lofty goals and good intentions mentioned in that opening paragraph. The promise of beating the Tax Man was hugely tempting … and that, says Jerri Mperdempes, an Investment Consultant at Flyt Property, was part of the problem.
‘When we started offering these investments 24 months ago, there was a lot of negative sentiment around 12J,’ he says. ‘When it first came out, for a lot of the guys it was more a case of, “Let’s see if we can try to avoid paying tax”, and they would come up with all sorts of hare-brained schemes to try to jimmy the system. That made it difficult to get something to market, especially with savvy investors who were aware of what was happening. We had to overcome a lot of the stigma that had come to be associated with 12J.’
Flyt’s 12J product follows the standard process: as an investor, you invest into a 12J Venture Capital Company, which in turn invests into a property holding company, which purchases the property. The investor may receive dividends during the investment period, but they need to be invested for five years before they can redeem their initial investment. The investor then enjoys a tax refund of up to 45% on that investment.
This is all background information, but it’s crucial when it comes to answering the key question: Given the impact of COVID-19 on our tourism sector, what is the future of 12J property investments? And here Mperdempes offers a reminder: ‘These investments aren’t a short-term thing. You don’t access to the money for the first five years anyway.’
The long-term view
Bear that in mind as you consider the disastrous state of the local tourism industry. With international travel virtually having ground to a complete halt, and with many tourism-related businesses facing closure, the immediate picture is a bleak one.
‘To answer the question of “What next for 12J?”, first you have to ask: “How viable is tourism, leisure and hospitality?” That ship has sailed for the next six to 12 months,’ Mperdempes says. ‘In terms of your international holidaymaker, the market is going to be very restricted for at least the next 12 months … but I don’t think it’ll be a long-term thing. This is where an intelligent approach to investing needs to come in. The tourism industry has obviously taken a serious hiding. But then you have to ask: “Is there an opportunity within that sector that will cater for those who have to travel?” Here you’re looking at your local business traveller, and I think there’s still opportunity there.’
The other opportunity, he says, is student accommodation. ‘University students will want to be on or near campus, and they need to have accommodation, so that market is pretty safe. At Flyt we’ve been looking at this market – and an advantage that we have is that the assets in our 12J portfolio are already owned by us, so there’s no money owed to the banks in this portfolio.’
Mperdempes is upbeat about 12J property investments – and not just because he’s selling them. Tourists may not want to travel for the time being, but businesspeople will need to move around as the economy reopens. Holidaymakers may not be looking for a place to stay right now, but students will need a place to live when varsities go back.
And, ultimately, 12J investments are designed for the long term. Five years from now, when you’re able to redeem today’s initial investment, the economic nightmare of 2020 may be a painful (but distant) memory.
Let’s hope so.