The Capital Markets Authority gazetted the Real Estate Investment Trusts legislation in 2013, providing a backdrop for investors, fund managers and property developers to form REIT products.
Under the scheme investors were allowed to pool their funds and invest jointly in a trust, and after a certain period, earn profits or income from real estate, as beneficiaries.
These investment vehicles would have several advantages over conventional real estate products. For instance, unlike assets such as land, it would be easier to liquidate REITs at any time.
“A lot of people have been in situations where they have bought land hoping to sell it for a profit in future, but when they want to sell the land, either they struggle to find a buyer, or encounter some dispute with someone who has squatted on the land. It is estimated that we have approximately Sh12 trillion locked up in illiquid plots of land in Kenya,” says Ruth Okal, a real estate investment expert.
Listed and traded publicly on securities markets, REITs would also offer investors transparency. They would also be exempt from double taxation, guaranteeing investors better returns.
“With REITs, people would get an opportunity to have a mixed portfolio of assets, that would otherwise not be possible in direct ownership. Equally importantly, they would be leaving these assets to people who have the expertise to manage and deliver the real estate asset, while they have peace of mind to get on with their day job,” said Ruth.
Unlike other businesses, whose incomes are affected by a lot of external factors, REITs would also provide investors with stable and predictable income because they rely on rental income that comes to the asset regularly. For these reasons, it was expected that the uptake of REITs in the country would be fast.
This has, however, not been the case, as currently, there are only three CMA-approved REITs on offer. These are Fahari IREIT, Acorn ASA IREIT and DREIT, and the Laptrust Imara Ireit.
One of the issues behind the low uptake of REITs, especially the D-REITs, is high capital requirements. Based on the current regulations, the minimum investment amount for a D-REIT is set at Sh5 million, but the CMA says it is working on reducing this to Sh10,000. Unrestricted I-REITs do not have a minimum investment requirement.
Uncertainty about how tax is administered over time has also been an issue that has deterred investors from venturing into the REITs. The REITS Association of Kenya has been lobbying to have a harmonisation of taxes with CMA regulations.
“Most of the parties trying to set up REITs are quite shy because they really do not know what the tax environment will look like in future. We need to harmonise policies to ensure that if a declaration is made that a certain item is tax exempt, that does not change within a short period when perhaps there is a change of regime,” says Ruth.
Another issue that REITs have been grappling with is administrative overheads, which tend to eat into a significant amount of the profits obtained, leaving only a small remainder to be distributed to the shareholders.
“When you approach fund managers, or institutional investors and ask them to invest in REITs, a lot of times the feedback they will give you is why should I invest in REITs where the average yield is about 10 percent, when I can invest in government securities and get a return of about 14-15 percent,” says Ruth.
She notes that the future of investing in property is in REITs. In Kenya, continuous investor education is needed, because these are relatively new products in the market.
