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Ideas & Debate

Deepen REITs to boost Uhuru housing plans

Former Fusion Group chief executive Luke Kinoti (left) and China Wu Yi deputy manager Xion Kaihua during the launch of the first D-REIT in the Kenyan market in June 2016. FILE PHOTO | NMG
Former Fusion Group chief executive Luke Kinoti (left) and China Wu Yi deputy manager Xion Kaihua during the launch of the first D-REIT in the Kenyan market in June 2016. FILE PHOTO | NMG 

That President Uhuru Kenyatta has put the provision of affordable housing among his ‘Big Four’ plans is laudable.

Accessible and adequate housing is one of the key pillars of the Bill of Rights enshrined in the Kenyan Constitution. Kenya suffers a huge deficit of affordable housing, mostly due to high prices of land.

In the third medium term plan (MTP III), the government has committed to delivering 500,000 housing units by 2022, mostly in major cities across the country. The Treasury, in the 2018 Budget Policy Statement, has outlined five key strategies to actualise this ambition.

First is by reducing corporate tax rate for developers who construct at least 100 housing units in a year. Second is strengthening the National Housing Corporation’s ability to finance low-cost housing by creating a National Social Housing Development Fund.

Third is to establish the Kenya Mortgage Refinance Company, a public private partnership aimed at raising long-term funds from capital markets for the purpose of extending long-term loans to financial institutions secured against mortgages.

Fourth is to enhance initiatives to upgrade slums and informal settlements. Lastly, to review the National Construction Authority Act and to enact the Built Environment Bill to create sustainable building standards, design procedures and green building codes for the sustainability and safety of the housing sub-sector.

All the proposed initiatives are commendable. However, a product with huge potential that is regrettably missing from the government’s strategy is the real estate investment trusts (REITs), which could be very instrumental in actualising the affordable housing goal and promoting financial inclusion. It has numerous advantages over other proposed plans.

The legal framework for REITs is available. In 2013, Kenya became the third African country to establish REIT as an investment vehicle by making the Capital Markets (Real Estate Investment Trusts) (Collective Investment Schemes) Regulations, 2013.

A REIT is a regulated investment vehicle that enables people to collectively raise funds for the acquisition of interests in a trust with the intention of earning profits or income from real estate.

Thus, a REIT may own, develop and operate income-producing real estate such as apartments, shopping centres and offices, and subsequently distribute the REIT income. The concept was introduced by the US Congress in 1960 but has since evolved and spread.

The REITs regulations provide that a REIT must be structured as an unincorporated common law trust, divided into units, and established under a trust deed. It should have a trustee, a manager, and a promoter, all licensed by the Capital Markets Authority (CMA).

To date, the CMA has approved and licensed various firms as REIT managers and trustees.

The regulations further provide a REIT may be established as a development REIT (D-REIT) or an income REIT (I-REIT). A D-REIT is aimed at construction of real estate projects.

An issue of D-REIT can only be made as a restricted offer to a minimum of seven professional investors with minimum subscription or offer parcels of Sh5 million each.  

On the other hand, I-REIT is aimed at running income-generating estates. I-REIT investors’ mainly gain from capital appreciation of the property and from incomes in form of rents paid by occupants of their real estate investments.

The regulations require that at least 80 per cent of the rental earnings must be distributed to unit-holders twice a year.

Notably, a D-REIT can be converted to an I-REIT. Further, either can be structured to be shariah-compliant.

REITs in Kenya have an advantage of being exempt from taxes save for withholding tax on interest income and dividends. There is no stamp duty chargeable when a promoter transfers property into the REIT or when one investor transfers the units to another investor, thus minimising transactional and set-up cost.

REITs units can be listed on the Nairobi Securities Exchange. This assures the unit-holders of the highest standards of governance and transparency as listed REITs are exposed to rigorous disclosure requirements.

Sadly, the market uptake of REITs in Kenya has been low. Only the Stanlib Fahari i-REIT is listed and its trading performance has not been encouraging. An attempt by Fusion Capital to list the first D-REIT failed due to undersubscription.

This poor market performance can be attributed to low market knowledge and lack of institutional support. This makes a case for heightening investor awareness and understanding of the product and what it means to the Kenyan economy.

There is no better time to boost the uptake of REITs than now. If Mr Kenyatta were to endorse REITs as one of his strategies to actualise affordable housing, it would lift the veil of elitism and complexity that clouds the REIT framework, and consequently unleash its potential as a tool for capital financing of affordable housing projects.

For REITs to succeed, they must attain a certain critical mass necessary to create liquidity. In context of REITs focused on providing affordable residential housing, the property market needs to be large enough. In addition, such REITs need to deliver competitive returns to attract institutional investors such as pension funds.

As the REIT market is still in early stages, the government should have ‘skin in the game’ by having a public entity set pace and issue a government-backed REIT. Equally, there is need to incentivise the private sector to experiment with various affordable housing-tailored REITs, to make them attractive target and stimulate investment.

In addition to actualising affordable housing initiative, deepening REITs will help broaden the capital markets. REITs securities would rally other products such as exchange-traded funds or exchange-traded derivatives when they are introduced.

Having deep and liquid capital markets is a plus, as it creates markets that can be tapped to raise capital for other ‘Big Four’ projects. Lastly, REITs will enhance stability in property markets by making mechanisms for price discovery available. Mr Kenyatta, your endorsement is required.

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