Housing sector gets a boost from new financing laws

Property developers’ hope of raising project funds through the sale of shares at the Nairobi Stock Exchange have been rekindled with the completion of regulations on Real Estate Investment Trusts (REITS) that are now under discussion by the industry.

Reits allow developers to raise money for a project by issuing shares in the project which is listed at the stock exchange.

The shareholders can transfer ownership to third parties.

The arrangement injects liquidity into the construction sector, allowing developers to handle more and bigger projects.

Housing shortage

It is expected that the regulations will help to alleviate the shortage of houses estimated by real estate players at a million units and is growing by 30,000 every year.

The draft regulations require that pooled investments in property be registered, weeding out self styled promoters who collect money from the public and disappear without developing properties and paying members interest as agreed.

To qualify for registration and listing, a trust should have at least 100 members with the share capital set at Sh500 million for high end housing and non-residential properties and Sh50 million for low and medium- cost housing.

The trusts will be registered under the Trustee Act and with the Capital Markets Authority.

To overcome governance challenges, developers converting into trusts will be allowed a 50 per cent ownership but a stake cap of 25 per cent is placed on all other members.

That means a trust can have as few as three members but listing will only be open to those with at least 100 members.

But critics fear the entry bar has been set too high.

“The number should be reduced for those who are already in the business and have put in their investments. If you are starting out from scratch, perhaps you can look around for 100 investors,” said Mr Daniel Ojijo, the executive chairman of the Mentor Group of companies involved in various aspects of real estate.

Operation costs of real estate investment are expected to go up, with registration fees at a minimum of shillings half a million, quarterly submissions of accounts and financial statement and employment of fully and properly qualified persons in the real estate business.

The trusts will now be required to pay annual fees, ranging from Sh500,000 for those with assets below Sh1 billion and Sh2.5 million for those with assets above Sh5 billion.

Previously, such trusts did not have caps or floors in terms of capital or even registration charges, thereby keeping their cost of operations low.

While agreeing to the regulations in principle, some players expressed fear the move would stifle free enterprise where market forces have guided operations.

“I have a problem with putting caps on the investments people should make or are allowed,” said Mr Wilberforce Oundo, managing director at Regent Management, the property consulting firm.

Mr Oundo said the definition of professionals such as valuers and property managers should be harmonised with those of existing Acts of Parliament.

The new rules propose that a principal valuer must have a minimum capital of Sh5 million.

The draft also puts property trusts under the same quarterly reporting regime as that of commercial banks, insurance companies and investment banks.

Stricts laws have been imposed on consultants in the sector, with property management firms being required to pay registration fees of Sh1 million, the same as that of a real estate investment management company.

The draft also promotes arm length dealings between the trust and the management company with at least half of the trustees required to be independent and not associated with the management firm.

Failing to get adequate support during the placement of the trust in the market, the promoters will pay interest to subscribers at the rate of 15 per cent six weeks after the listing closure as penalty.

The high cost of tying down capital appears to be aimed at safeguarding investors funds while ensuring money raised from Reits cannot be used for speculative purposes.