Ideas & Debate

Why Reits hold the key to property price discovery

An earlier Reits sensitisation workshop. The market segment for pooling capital is ready for additional offers over the coming years.  FILE photo | nmg
An earlier Reits sensitisation workshop. The market segment for pooling capital is ready for additional offers over the coming years. FILE photo | nmg 

Nothing much has happened in the real estate investments trusts (Reits) space since Stanlib listed its Fahari income Reit (or I-Reit) back in November 2015.

Well, there was the unsuccessful sale of a development Reit (or D-Reit) by Fusion Capital in mid-2016.

Apart from that, the Reit market has been pretty quiet. Reits, being collective instruments, allow investors to pool capital to develop and own large-scale real estate properties.

Because they are still nascent products in this market, tax break requests placed with Kenya Revenue Authority at the primary issuance stage are always likely to sail through—thereby designating them as tax efficient.

However, it is important to note that tax breaks on Reits have not been statutised and the tax efficiencies may not be open-ended.

This is a subject I will leave to tax experts. The introductory teasers aside, I think this market is now ripe for at least four more Reit listings over the next two years.

Therefore, I’m calling on the originators, issuers, dealers and approvers: elections are over, can we now convert those listing pipelines. Why am I interested in the listings? Well, in my assessment, Reits can be beneficial in a number of ways—and I will identify two core.

First, they can help Kenyans migrate from this speculative psychological fixation with land as a mega-store of capital gains, to the view of land as a cash-flow vantage. It’s a tough one but can be achieved, albeit with time.

Second, property prices in this town are almost ridiculous. And the ridiculousness, to a large extent, is driven by a lack of proper price discovery mechanisms. Reits can help with the discovery.

Today, property pricing in this town, whether real estate or residential, is almost akin to guesswork. The best you can get is a pricing mechanism based on last known transaction price within the precincts (or location) of the property in question.

Let’s stick with the phrase “based on last known transaction” for a moment. Reits invest in properties (otherwise they are obliged to return cash back to investors).

And because they operate within a strict disclosure regime, they have to reveal actual purchase prices as well as lease prices when they let them out. Actual transaction prices for properties, purchase or lease, in this town are a rarity.

This has continued to drive opacity-which in turn exacerbates the lack of price discovery. If Reits, especially the income-based, went on a buy spree in this town--from Eastlands to Westlands to Lavington to Loresho (and not forgetting the Rongai diaspora)—it would help introduce a pricing discipline.

And here’s why: because of the strict disclosure requirements, we would know the actual transaction price, which will be very competitive.

We will also know the actual lease prices for tenants. This would then set the real price or rent for properties within the same location.

In turn, subsequent offer prices for adjustment properties would tend to gravitate towards the real price—either below or at par.

In fact, new buyers would not be treated to the supernova-type ludicrous price explosions that we are in today; and which has reduced home ownership, especially for ordinary folks, into a big pied-piper calibre nightmare.

Essentially, let’s forget unga-type subsidies, let’s forget price controls. Let’s have more Reits publicly listed.

Mr Bodo is an investment analyst [email protected]