The local property market has witnessed an exponential growth over the years. Property values in Kenya have increased to become among some of the best in the region. For instance, the value of private residential buildings in Nairobi has grown by 60% since last year.
On the other hand, Kenyans looking for residential commercial units have experienced more than a 100% surge in property prices as compared to the same period in 2015.
Despite the abundance of property, the interest rates for developments have remained extremely high and the penetration of housing units among lower income segments is still extremely low.
When it comes to investment opportunities in real estate, the current trends in the housing market present a unique opportunity for private investors and property developers to exploit and maximize returns.
In fact, the recent launch of REITs (Real Estate Investment Trusts) has provided the perfect investment vehicle for local property investors.
In 2015, the NSE (Nairobi Securities Exchange) became the fourth bourse in Africa to launch the REITs market by facilitating the launch of the Fahari I-REIT public offer by Stanlib.
The offering was instrumental in raising KES. 3 billion that got used for buying and developing commercial properties.
Today, even the Capital Markets Authority (CMA) is encouraging players in the real estate sector to take advantage of this new investment platform.
What are REITs?
REITs are Real Estate Companies or Corporations which own, manage and develop various types of properties. They are investment instruments that collect funds to buy or build real estate properties which in turn are rented or sold to generate income. The income gained is distributed among the shareholders annually.
REITs are traded like shares and can be purchased and sold in line with regulations set by the CMA (Capital Markets Authority). They can choose to concentrate on one genre of real estate or diversify into broader categories.
Types of REITs in Kenya
There are two types of REITs in Kenya namely: The difference between the two is:
- I-REIT (Income REIT): This is a collective investment scheme where investors pool money for the purpose of owning and managing income generating real estate for their benefit. Income returns are less volatile and more predictable due to distributions among investors being underpinned by commercial leases.
- D-REIT (Development REIT): This is a collective investment scheme where investors pool money with the aim of building and developing real estate properties. The returns are generated from capital gains from a project when the firm completes construction and exits by selling the property to the open market, or to an Income REIT.
REITs can be further be classified into either open-ended or close-ended categories. A brief summary of each category is:
- Open-ended REIT: In this case, the buying and selling of REIT units occur directly between the issuing company and investors. There’s no limit to the number of units an investor can purchase with the company issuing more shares as investor demand increases.
- Close-ended REIT: In close-ended REITs, once an offering has been concluded, units can only be traded via the stock exchange for a listed offer. Alternatively, they can be traded over the counter if the offer allows this.
Standard Features of REITs
A common characteristic of REITs in Kenya is they are structured as close ended trusts and listed on the Nairobi Securities Exchange. Here are other things you can expect:
- Property development restrictions: Development property is typically restricted to 15 percent of the REIT value. This helps control the risk associated with developing a property.
- Restrictions on Investment size: The primary sponsor is usually allowed majority ownership of up to 50%. Other investor’s stake is capped at 25%. This is done to encourage current property management firms and property investment firms to shift to REIT structures.
- Membership size: A minimum of 100 shareholders are required for a publicly listed REIT, to assist in maintaining liquidity.
- Income distribution: A minimum of 80% of the income generated has to be distributed among shareholders holders as dividends.
The Capital Markets Authority has set the minimum value for REITs that are publicly listed and focus on medium and low-cost housing at KES. 50 million. For REITs investing in high-end properties, the minimum asset value is set at KES. 500 million.
How can REITs benefit Investors and the Real Estate Sector?
- Access to funds: REITs provide an opportunity for developers to raise funds in the Capital market. The makes financing developments easier and hence reduces the interest rates for these properties. It also forces banks to revise their mortgage rates downwards.
- Consistent returns: Incomes derived from REITs in the form of dividends are fairly predictable owing to the way they are drawn. Most of the incomes are drawn from rents of property occupants which are typically negotiated and payment agreed for a certain period of time.
- Offers liquidity: Investments in I-REITs can easily be converted into liquid cash by offering them for redemption in open-ended funds, or selling the units in the market for close ended funds.
- Tax efficiency: REITs are exempt from a majority of taxes including:
- Corporate Tax
- VAT on any rental income
- VAT on professional services
- Capital gains Tax
- Stamp Duty on sale/purchase/transfer of properties
REITs are a good investment vehicle for small and medium investors due to the many advantages they have over securities in traditional firms. Proposed new regulations are also seeking to establish a hybrid model comprising D-REITs and I-REITs, to better suit the needs of local developers and investors.
REITs can give you a sense of ownership in a growing real estate sector that seems to slowly become the preserve of a few. Ordinary Kenyans can now have access to mega infrastructural projects that would otherwise be impossible due to the high capital requirements. Below is a list of REITs in Kenya you can join to improve your investment portfolio. Happy Investing!
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