Reits best real estate bet for low income earners

Real estate investment trusts (Reits) have featured prominently in business news since the Capital Markets (Real Estate Investment Trusts and Collective Investment Schemes) Regulations came to effect last year. Among their benefits is the entry of low-income earners into real estate investment.

For low-income earners, investment in real estate has been elusive. While the sector has high returns on investment, its capital demands are limiting. Many investors rely on loans from financial institutions while others exploit avenues such as joint venture agreements for financing.

Bank loans, outweighing other sources of income, have their shortcomings. Lenders will ask for security for the loan, a requirement many low-income earners may not easily meet. The interest rates are also discouraging.

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With Reits, low-income earners can pool their individual contributions and collectively invest in real estate projects. They get dividends as beneficiaries of the trust.

The regulations introduce two major types of Reits — the development Reits (D-Reits) and investment Reits (I-Reits). While D-Reits’ objectives are construction and development of real estate, I-Reits target income-generating property. A shariah-compliant Reit can be listed as a third type.

A look at the offers for the different Reits reveals that low-income earners may still be locked out of some Reits. The minimum subscription for offers in D-Reits is Sh5 million.

Offers in I-Reits can be structured either as restricted or unrestricted, the former having the same minimum subscription limit as D-Reits. Unrestricted I-Reits adopt a more affordable structure than the others. The minimum subscription for their securities offer is flexible. They must be listed.

A low-income earner’s ability to meet the minimum subscription for D-REITs and restricted I-REITs is debatable. For low-income earners, their entry into real estate investment is the first benefit. Reits address the capital requirements challenge.

Real estate appreciates in value over time. Reits present a high-returns option to low-income earners in comparison to other stock.

Management of the portfolio is in the hands of professionals. The investment options are evaluated by Reits managers who are licensed by the Capital Markets Authority (CMA).

The managers understand the risk considerations of each target project better than an individual investor. Their interests are also safeguarded by licensed trustees.

Income from the investments is regulated. The share of the income to be re-invested and distributed to investors is provided for under the regulations.

Investors will have to wait until the first Reit is approved by CMA and subsequently listed, depending on its structure. Structurally, a person (promoter) comes up with the idea of forming the Reit and registers it as a trust.

In the trust deed, the promoter appoints a trustee. The two apply jointly to CMA for approval of the Reit. Prior to the application, the Reit must have appointed other required stakeholders, among them the Reit manager of the trust.

As at July 17, CMA had licensed five Reits managers and two trustees.

Globally, compared to other stock, Reits continue to offer a more competitive investment option. An evaluation of the investment approaches of D-Reits and I-Reits indicate that the former may outperform the latter.

I-Reits target developed property. They will be competing with other buyers of property in the market. Increased demand yields high prices. Therefore, the value of property may be higher, leading to low returns on investment.

D-Reits may benefit from their investment approach. Their capital is used in developing their own real estate, escaping the high cost of property acquisition that I-Reits may have to bear. Their returns on investment are, therefore, likely to be higher.

Another trend that may find its way into the Kenyan market with time is the structuring of Reits to be sector specific. For instance, healthcare Reits have gained popularity in the American market.

Strong Reits are also likely to emerge. As with any product, as they increase in number, competition will lead to innovation, edging out the less strategic and creating strong, preferable Reits.

The battle for dominance will be fuelled by their structure and the strategy, creativity and expertise of the managers.

While Reits may provide low-income earners with an opportunity to join the real estate sector, their participation may be restricted to those whose minimum subscription is not regulated. Their reception of the product, however, remains to be seen.

Mr Kariuki is a lawyer at KN Associates LLP, a corporate and commercial law firm in Nairobi.