One of Kenya’s Big Four Agenda is bridging the gap in affordable housing by delivering 500,000 housing units by 2023. This calls for identification of an innovative funding model which may include combined efforts of commercial banks and non-bank finance institutions as well as the capital markets.
While housing has traditionally been funded through mortgage financing, the institutions providing these facilities have raised capital through medium term notes (corporate bonds) for on lending to mortgage applicants. Cases in point is HF Group and Shelter Afrique.
However, it is possible for individuals to pool resources through a Collective Investment Scheme (CIS) known in capital markets as a Real Estate Investment Trust (REIT).
A REIT is simply a well-structured and formally approved Chama, whose money is channelled towards buying existing real estate or construction.
By taking up “units”, akin to shares, investors may earn returns as beneficiaries of the trust. In Kiswahili it may be referred to as “uaminifu wa uwekezaji wa nyumba”
This Scheme offers the public an opportunity to partner with the Government in achieving its affordable housing agenda.
They carry tremendous benefits to investors including: easy access and ownership in the growing real estate sector; diversification of investments to mitigate against concentration risks; liquidity through tradability in the secondary market ; as well as access to professionally managed portfolios, limited legal liability for the shareholders of a tax-qualified REIT, and a regular income stream for the investor via distributed dividends.
The benefits outlined above are not limited to retail investors. The Retirement Benefits Authority (RBA) for instance permits fund managers to invest up to 30 percent of their funds in real estate.
Notably, there are pension schemes that have in the past found it difficult to compensate retirees due to concentration of investments in illiquid brick and mortar asset classes.
Holding such assets in REITs, however, allows for faster conversion into cash, thus mitigating this risk.
For real estate developers, REITs result in manageable development costs and tax advantages.
Generally, developers will opt for short-term financing from banks and surrender alternative security or in other cases, charge the land on which the development is undertaken.
Subsequently, a significant portion of the income generated from the development is applied towards servicing the loans, consequently delaying break-even and profit from the investments.
Alternatively, landowners have sought equity finance but with a bit of reluctance due to potential dilution of ownership. REITs therefore present a more suitable finance option for real estate developers.
In Kenya, REITs are largely tax-exempt vehicles. First, subsidiaries or investee companies, which are entities through which REITs hold their properties are exempt from rental tax. For example, the Stanlib Fahari-REIT owns Greenspan Mall in Donholm as its investee company.
The income of investee companies (such as Greenspan Mall) will flow directly to the REITs (Stanlib REIT) tax-free thereby increase the overall return to the REIT investor. The distribution of the income from the REIT to unitholders is, therefore, only subject to a final tax of 5%.
Secondly, land transfer currently attracts a Stamp Duty of 2 to 4 percent of the land value, depending on the location. As such if you are buying land worth four million shillings, you should expect to pay an extra Ksh80,000 on top of that as the stamp duty charge. Transfer of property to a REIT on the other hand is exempt from Stamp Duty.
With these benefits property developers and investors alike need to seriously consider taking up REITS which is a capital markets product that can unlock funding for the real estate sector and support the Government’s agenda of delivering affordable housing units.
The writer is Officer Capital Markets Master Plan Secretariat, CMA.