12J investment

Invest in prime Atlantic Seaboard real estate, cut your tax. Hear about 12Cape, a 12J opportunity

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Cape Town properties that combine the space and privacy of apartments with the conveniences and luxuries associated with upmarket hotels are attracting a lot of interest from real estate investors and business and holiday travellers. In this podcast, Hugo Venter of 12Cape shares the details of a 12J investment opportunity that takes advantage of the demand for sectional title properties that boast sea and mountain views. Time is running out to use the tax deduction associated with 12J schemes, with the tax incentive ending in June. For more information click here. – Jackie Cameron

Hugo Venter on his background:

I lived in the UK for 17 years, moved back to South Africa and looked around at opportunities that exist within the country. One of the things that was clear to me is that SA is a beautiful country. We drove through the whole country for three months. You see amazing beauty in the countryside, meet lots of foreigners here on holiday and I realised that in future, there will be more and more attractiveness for people to come to South Africa. When you speak to people, you just hear these ideas that they’ve got – a very entrepreneurial spirit which I like a lot. We sat down and said, “If I stayed here, what would I like to be involved in?”

The hospitality [and] tourism industry was an obvious one for me. It does something great for the country. It creates jobs and it’s something that you could do even if you are unskilled, you can be involved in the industry or you could be the CEO of a company involved in that industry. The key thing is, how do we make it a viable investment for people? That’s how, I think. 12J got attached to that opportunity.

On 12J investments:

12J is something I knew quite well from my days in the UK, because in 1995 they set up venture capital trusts. It’s been running for a very long time, very successfully. They raise anything between £600-£700 million every year that gets invested through these companies. What we did in South Africa was actually copying that regime. When I came back, I thought it is quite clever for the government to come up with an incentive for people, to know where their tax money is going [and] direct their tax money into areas where you can create jobs. We [12Cape] then married those two. We really saw the opportunity in hospitality [and] tourism. It was great, but how do you make it something that people want to invest into? Then, we attached a 12J incentive to it. I must admit, it’s worked out quite well.

On his underlying business model:

When I moved back, I couldn’t find accommodation anywhere in Cape Town and that was because it was the ‘boom’ time of Airbnb. Everyone was renting out their place through Airbnb because there was a very high demand for it. I didn’t want to go stay in a hotel because the rooms are too small and I’ve got a young family. The place that you find is in the middle – somewhere where you can have space, self-catering and invite friends over. But some days you wake up and you think, “I’d really love if someone could come in and clean today.”

You could order a coffee or go upstairs to a communal area/swimming pool and just relax. It sits in the middle of those two. When we did our research, we found that this is the biggest growing area in hospitality globally. If you search around, you’ll find quite a few articles on Bloomberg [and] The Wall Street Journal, where there are already funds in the US and Europe being set up that invest specifically into this area [apartment hotels]. We think that especially during Covid, this really worked quite well. Again, if you’re in a hotel during that period, you’re very isolated. It’s a small space to operate in [and] the communal areas are closed.

If you’re checking into an Airbnb, you never know what you’re going to get. Because we have facilities here to make sure everything gets cleaned, everything gets done by the rules. People can check-in and enjoy all of those things in one place. But the other thing for us, within the ‘aparthotel’ model that’s really exciting, is that if you buy a hotel, you own the whole building. A building itself – if you want to sell that building – is quite complicated because there are very few buyers of a building with R200 -R400 million cost attached to it. But what we do now is actually buy the individual units.

I’m the title deed owner of 1,2 and 3 bedroom apartments in the whole building. You own the building, but you don’t own it as one piece. If I need liquidity, what am I selling? I’m selling 1 bedroom apartments in Sea Point. There’s a market for that – it’s a liquid market that trades every day. Perhaps the price is down 5% or maybe 10%, but I can sell it. You can create liquidity very easily whereas if you own the building, it’s not that easy. We also found that additional step we did for implementing our model worked quite well. We don’t have any separate apartments in separate buildings. We have all our apartments and one building, allowing us to control the majority of the body corporate. We make decisions in the building. We effectively own the building – but it’s not one big building that I own with one title deed.

On investing in this opportunity:

When they [investors] come in, they get to buy shares in 12Cape, which owns the underlying assets. Effectively, that investor becomes part of all the assets we own. A new investor coming in today, immediately owns a small piece of everything we own. It is all pooled together. An investor doesn’t come in and suddenly owns or gets allocated a unit. For us, it [mitigates] conflict. For example, if there were only two investors who each owned an apartment via our structure and I get one person to come and stay, which apartment do I book them into? It’s always going to feel as if there’s been a bit of discrimination. But now what happens is the guy comes, he stays here and it just get shared between the two equally.

On how returns are generated:

The returns are quite simple. We also view the returns as a bit of a currency hedge, because a lot of the people that stay here, the target market, remain foreigners. They come here and bring their dollars or euros. They spend it here at Latitude Aparthotel. The weaker the rand gets, the more people we expect will come from overseas – it’s just more attractive for them to come here.

We have some operating costs to run the business – the staff, levies, and the rates and taxes. Once you deduct all of that, you have some fund management expenses that we also need to deduct. Thereafter, the net cash flow that remains, we distribute in the form of a dividend to investors.

It’s a bi-annual, dividend. We make a decision bi-annually, but we have now realised that it’s going to become annual. Because 12J is coming to an end, we realise that it’s probably prudent to look at doing it annually. For new investors coming in, we will propose to move it to an annual dividend.

For more information click here.

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