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12Cape public company and Section 12J investment vehicle which owns and grows a portfolio of prime aparthotel assets in Cape Town which operates under the Latitude Aparthotel. Its aim is to deliver attractive risk-adjusted returns to shareholders for the medium to long-term with a simple and clearly defined strategy.
How does a portfolio of prime aparthotel assets in Cape Town achieve this?
Returns: The long term return potential of a portfolio of aparthotels in prime areas are derived from five independent drivers, with net income distributed as a dividend. Please read a more in depth discussion on these drivers in our next article. But to summarize:
- The Section 12J tax benefit, which ends on the 30th of June 2021. The incentive will not be extended beyond its current sunset date of 30 June 2021.
- Investing in Prime Real Estate at bulk pricing.
- The rise of the aparthotel.
- Global Tourism and Travel, with specific focus on Emerging Markets and the rise of the middle classes, the preferences and demographics in High Income Countries, technological advances in travelling, and Remote Working.
- The Latitude Aparthotel brand model has demonstrated its resilience through the pandemic by achieving an occupancy rate of 75% since opening in November 2019 (median occupancy of 79%).
Diversification: The diversification benefits of an investment in 12Cape Limited by an investor will depend on the remainder of such an investor’s portfolio. It is worth noting that the performance of the 12Cape assets are designed to be uncorrelated to SA Inc by virtue of internationally funded guests, and / or inversely correlated to the level of the Rand as a cheaper rand generally makes ours a more competitive destination, and exposure to prime real estate (especially apartment-style) which generally behave differently from other real estate markets, and are located in active and liquid secondary markets.
Compounding: The explanations above would not be complete without a sense of permanent harmony with society: In 2017, global tourism employed one in ten people on the planet. In South Africa, it is estimated that a permanent job can be sustained by less than ten tourist arrivals (this is lower than the c. 30 globally). With permanent natural advantages like our shared timeline with Europe, inverse seasons, and unmatched natural beauty, tourism is well placed to make a meaningful positive difference to employment in South Africa. Consider further that the Section 12J tax incentive promotes capacity building in the tourism sector, and amounts to a simple transfer of the tax burden from the investor to the tourist: funded in hard currency, boosting the local economy, and creating much needed employment. Given capacity constraints in our country and our city, the specific allowance for Section 12J investment in hotelkeepers seemed like a win-win decision from the Government.
Risk: Control-ownership of high quality residential apartment blocks in prime areas with conservative gearing (or a net cash position, as 12Cape currently has) provides a strategic value underpin to the portfolio. This was demonstrated recently by the marginal change (of less than 10%) in property asset values despite a global Covid-19 pandemic. The liquidity risk profile of the 12Cape portfolio is further reduced by the full tax deductibility of the investment which is akin to an upfront cash benefit of up to 45% for individual investors with high marginal tax rates, and the modular structure of our asset base (with building blocks comprising of individual units with separate title deeds in located in active and liquid secondary markets, albeit located in 12Cape controlled apartment blocks). The strategy is implemented by investment professionals who have extensive experience in the relevant asset classes, and who are also investors in 12Cape Limited, which is registered as an unlisted public company with requisite independent governance and control structures in place.
Why now? “The best time to plant a tree was 20 years ago. The second best time is now” is a wise proverb often employed in investment speak. There are, however, good reasons to consider 12Cape as an investment option right now:
One: The 12J benefit ends on the 30th of June 2021. Minister Tito Mboweni announced that Section 12J of the Income Tax Act relating to the venture capital company (VCC) incentive will not be extended beyond 30 June 2021. As this news spells the imminent end of a generous and innovative tax incentive to create jobs, it also provides much needed clarity for Section 12J funds (VCCs) and their qualifying companies. For investors, it means that investments in approved VCCs before the 30th of June 2021 will be 100% deductible from their taxable income.
Two: We have witnessed a dramatic reduction of accommodation supply in our target areas as a result of COVID-19.
Three: COVID-19 also brought about an opportunity to invest in strategic assets unlike any we have witnessed, and at attractive pricing points.
Four: In light of the “end of 12J”, the investment model of 12Cape remains unchanged. 12Cape and its Latitude Aparthotel was created with Section 12J capital and would not have existed without it. The model being proven and successful means that it is a natural time to replicate and scale it with larger institutional capital allocations after the 30th of June. It is for this reason that 12Cape is working with institutional investors interested in an investment case which rests on independent global structural trends to generate attractive risk adjusted returns to shareholders over long periods, without having to rely on a tax incentive. This is not the only example of how “12J” catalyzed foreign direct investment, with concomitant job creation and other positive spin-offs. 12Cape expects more such investors on the basis of a robust investment case proven by 12J capital over time.
Finally: Investors can still deduct 100% of their investment in 12Cape Limited from their taxable income by investing before 17.00 on the 30th of June 2021- contact us: here
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