Housing trusts plan fails to get off the ground

Two years ago, Real Estate Investment Trusts (REITs) were proposed as the solution to Kenya’s housing woes.

They were expected to provide an answer to all housing issues— from providing a new investment vehicle for returns seekers— to being an innovative avenue of raising cash for housing projects.

In their basic form, REITs are collective investment vehicles that buy and manage income property and mortgage loans and their shares at a stock exchange.

At a time when property prices were showing little signs of easing, REITs were a compelling proposition for both investors and property market players.

And since then, real estate growth remains unrelenting.

But two years on, no regulation has been passed for REITs to start operating in the country.

Consultations between market players— the Capital Markets Authority (CMA) and the Treasury— have so far yielded no fruits for market players.

And they blame this failure on the law governing taxation of property attached to collective investment vehicles.

With rental income categorised as a taxable item, how the Kenya Revenue Authority (KRA) hopes to get its dues remains hazy.

A similar dilemma faced unit trust providers.

Failure by some fund managers to charge withholding tax from their clients’ earnings is linked to differences in the interpretation of Section 20 of the Income Tax Act.

The law spells out withholding tax chargeable on unit trust returns which some providers misread and now find themselves facing KRA penalties and fines running into hundreds of millions of shillings.

The unit trust service providers on KRA’s list were last week said to be preparing a vigorous defence of their tax actions, citing the vagueness of the relevant law but analysts said the cost implication would eventually be passed on to the investors.

The last draft of the laws governing REITs was reportedly handed over to the capital markets regulator back in 2008.

The overwhelming feedback on the proposed REITs laws which was collated from capital markets players by advisory firm Vista Capital forced the CMA to head back to the drawing board with a view of sealing loopholes in the operation of investment trusts.

Still, no word is out on how soon they will become a reality in the local capital market.

“We’re still hoping that the market regulators will come up with guidelines on how real estate management companies can list the REITs,” said Joe Macharia, managing director at Bora Capital.Bora Capital. It was among the first property development firms to announce plans for the provision of REITs.

By June, 2008, the NSE and Capital Markets Authority (CMA) were expected to announce specific guidelines for a real estate Collective Investment Scheme (CIS) which best captures the local property market trends to include an organisation’s composition, market capitalisation and the process of listing of such REITs.

Under the current stipulations, there is no differentiation of CISs based on the nature of the investments they target.

Among the proposals was to have investment units in fund management firms that would specialise in REITs and the requirement to have such a fund run by a Real Estate Investment manager.

The Kenyan real estate market favours highly liquid cash buyers who are looking for an opportunity for buy- to let as opposed to those who take mortgage loans for home ownership.

Several local investors and international real estate think tanks have in the past cited REITs as the best ways to open up the capital tied up in property to spur real estate development.

Best remembered is Darin Gunesekera, an expert in low cost housing development who earlier in the year said such a guideline would encourage investment in low cost housing units in urban centres.