Weak property valuation seen hurting real estate listing

Poor property valuation threatens listing of Real Estate Investment Trusts (REITs) unless the proposed rules are reviewed.

It is currently difficult to tell who between the seller and buyer is getting the value for money, a Capital Markets Authority (CMA) workshop on the draft REITs guidelines heard.

Kerry Adby, a consultant from the International Securities Consultancy (ISC), said this opaqueness is due to a scarcity of data on transactions on houses, apartments and other properties in the Kenyan market.

“Valuation is difficult in a market that is less transparent in terms of sales,” said Mrs Adby. Some players have blamed the whole issue on incompetent property valuers.

Paul Sigsworth, the managing director of ICEA, which has sunk Sh10 billion in properties, said valuers “tend to be wrong 100 per cent of the time.”

Reduced liquidity

Investors are uncomfortable buying properties or any other securities whose value cannot be fairly estimated or is unknown and this has affected liquidity in the market which has been quite active in recent years.

Introducing REITs while valuations are poor will result in developers inheriting the illiquidity problem, which may end up beating the purpose of unlocking the full potential of real estate.

REITs are meant to open up the property market by breaking down huge projects into small bits that are sold to investors just like shares.

The REITs can either be developed by investing in putting up structures that are sold or rented on completion. Either way, proceeds are distributed like dividends.

The CMA proposal for REITs to have a minimum of seven investors added to the participants’ worries list, especially for large investment and pension funds.

READ: CMA sets Sh1m minimum for real estate investors

“This could lock out one of the largest base of investors of REITs,” said Paul Stichbury, the chief executive of Pine Bridge Investments.

If the proposals passed, it would mean that the billions of shillings held by pension and investment firms would be out of reach for property developers, so far starved of alternative financing other than bank loans.

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