Invest your 12J tax saving where airline entrepreneur Gidon Novick has his own money

Time is running out to take advantage of a rare tax deduction that allows you to chop your income tax bill – in exchange for investing in a South African venture capital company. In this interview, you’ll hear from South African entrepreneur Gidon Novick, who started Kulula and Lift, about a 12J fund that is developing upmarket retirement homes in Johannesburg and Cape Town. He has his own money in the fund. After you’ve listened to the interview, go to the BizNews.com 12J section for full details and to register your interest in the investment. – Jackie Cameron

Gidon Novick on what a 12J investment is:

It’s been around for quite a while now. It’s actually coming towards the end of its life with a sunset clause in June this year. Effectively, it’s been an incentive to encourage investment into certain sectors of the economy. It’s been a very successful incentive. We’ve been in the business for about five years with about a 12J fund, and our focus has been property related investments and particularly hotels. The new fund that we are launching [is] also with a property theme in a very interesting space.

On investing in the retirement market:

Covid had a dramatic impact on various property sectors, and hospitality in particular has been very badly hit – although we are seeing a very good recovery on the hotel hospitality side. There’s a few very interesting themes emerging in property. One of them is senior living, we call it, which is really accommodation for elderly people. It’s a space that has very strong, pent-up demand. There’s long waiting lists for people to get into good facilities.

You’ve got the demographic issue of more older people. People are living longer. The percentage of the population in the over-70 category is growing and it’s expected to grow over the next few decades. This is not just a South African phenomenon. It’s happening around the world. Our feeling is that there’s a real opportunity to – much like we’ve done in the hotel and airline industries – create a new, fresh offering that really talks to the ageing population of today – not the ageing population of time gone by.

On the investment:

[The minimum investment is R1m]. The maximum individual tax-deductible investment is R2.5m in terms of 12J. We have people doing multiple investments across families. So, one can increase that.

We’re investing into a fund that has underlying investments into the senior living space – you effectively have part ownership of a senior living business which has property as an underpinning. It physically owns the properties. Our model is to actually develop the properties ourselves. We effectively raise the capital into the fund. We buy the land into the underlying companies and then we develop the facilities from scratch. We’re coming in at a cost level, as opposed to buying an existing operation or facility that’s been built by somebody else.

On the targeted rate of return:

[Our] target returns are very much what we hope to achieve – but it’s a target. The way we get to the target is that there’s a few components to the return. The one is the return you effectively get from the tax benefit. If you had to invest into a 12J company [and] all that they did was gave you your money back after a five-year period, that would result in an 8% annualised return just on its own.

That’s really been the attractiveness of 12J – half of your return just about is coming through the tax incentive itself The rest is coming through the business model itself, which is a model of constructing these sophisticated, beautifully designed facilities and then selling them. Effectively, our customers will be buying a lifetime usage of the unit and of all the facilities in the building.

That gets passed on when our customers pass on. The funding, or the quantum that they paid – less a depreciation – gets paid off their estate. Effectively, they’re paying a lifetime usage for their unit. These are the residents. This is the underlying business model for the senior living facility, is to construct the building and to sell off life rights to customers [and] residents to enable them to live in their unit and make use of the facilities for the rest of their life.

On investors benefitting from the underlying growth in the property value:

That’s the business model in a nutshell. The underlying growth accrues to the owner – to the fund in this case. What’s really, I think, quite interesting in the models [is] that it aligns incentives very well. The incentive for the owners of the business – ourselves – to, firstly, build a very attractive building with the right facilities, care, culture and efficiencies – because residents are also going to be paying a fee (effectively a levy every month) to stay in the place. Our incentive needs to be to make it as efficient as possible and obviously to create an experience as desirable as possible. If we do that well,  then when we ultimately sell that unit, the capital growth, it’s going to be maximised. We’re incentivised to create beautiful places and a beautiful experience over time.

On how investors get their returns/annual income:

That is part of the model. The hospitality space has been quite challenging, as far as annual returns [are concerned], so we haven’t paid dividends over the last couple of years. In the hotel category, there’s a mix of three things. There’s a tax incentive. The return that you get from that, effectively, is your annual return. Then at the end, there’s the capital uplift in the value of the asset. That assessment will either be sold – in this case in the form of last rites that are sold to residents. An alternative would be to refinance the portfolio and repurchase shares from investors, to allow them to exit over a period of time.

On the amount of investors who can access the opportunity:

The fund is limited by the opportunities that we have. We’re quite confident that this has got national appeal, in terms of the need for these higher-end senior living facilities, and particularly the way that we think we’re going to do it – with a focus on hospitality and trying to create some disruption in the category. The short answer is there’s no limit. But, the real limiting factor is the 12J timing, the window in terms of getting the tax reduction is coming to an end at the end of June. It’s an unusual time because 12J investors are used to making the investments at the end of February every year. So in this particular year, they need to be more prepared and more ready to commit to an investment before the end of June.

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