Can real estate investment trusts lead to affordable home ownership?

Kenya's affordable housing agenda is a government initiative aimed at addressing the housing deficit. This initiative aligns with the government's broader development goals outlined in its Vision 2030 blueprint.

The key challenges that have been identified as the barriers to delivering this agenda include (i) limited capacity for rapid construction of affordable homes; (ii) lack of guaranteed off-take which undermines property developers’ confidence in exiting developments upon completion; and, (iii) limited access to financing options for developers.

The challenge of accessing financing holds true as it is crucial to securing the capital required for real estate development. Amid this challenge, there is a proposal that REITs could offer a viable strategy to support the affordable housing agenda mainly in the form of pooling funds from multiple investors to provide capital for property developers interested in affordable housing projects.

REITs are investment vehicles that own, operate, or finance income-producing real estate assets. They are typically structured as trusts and are subject to regulatory oversight and compliance.

So, while they may not be physical real estate that an investor can directly own and manage, they provide exposure to the real estate market and its potential returns.

REITs are inherently profit-driven, primarily generating returns through capital appreciation from property development or rental income from properties in their portfolio.

While REITs can indeed play a significant role in stimulating property development which can help close the housing gap, their profit-driven nature may limit their effectiveness in directly bridging the affordability gap.

The profit motive may dictate investing in properties and projects promising higher rental returns or purchase prices, which may further exacerbate affordability issues for low and middle-income households.

If the scepticism around the REIT model being an appropriate avenue for the affordable housing agenda is warranted, it may be advisable to critically evaluate and clarify how affordable housing projects would align with the financial criteria and return expectations of REIT investors.

The writer is a Partner at Cliffe Dekker Hofmeyr (CDH) Kenya.