As the equity market continues to perform dismally, pension funds now plan to establish Real Estate Investment Trusts (Reits) to diversify their assets and increase returns.
A Reit is a regulated collective investment vehicle that enables investors to contribute funds for the acquisition of rights to a trust to earn profits or income from real estate.
Reits allow individuals to invest in large-scale projects they would otherwise have been financially unable to do alone.
With the establishment of the Reits, pension funds plan to invest in the State’s affordable housing, green property, and infrastructure projects.
The Kenya National Reit (KNR) which was formed by financial institutions including pension administrators will be the accreditation body and will register and consolidate all Reits set up by pension firms to raise funds from local and international investors.
It is set to be listed at Nairobi Securities Exchange (NSE).
“It is a new thinking and is the best way of scaling these affordable housing initiatives,” says insurance brokerage firm, Liaison Group managing director Tom Mulwa.
“Reit set up in Kenya is good market development giving investors a choice to diversify their portfolios and mitigate risk,” says Simon Nyakundi, a former pension expert at Standard Chartered Bank and founder of pension administrator, Kingsland Court.
“Investing in property directly requires huge sums of money and takes a lot of time to put together. Other markets like South Africa have more Reits than Kenya. While in Kenya we have grown our pension funds that are chasing few investable assets.”
The pension sector controlled Sh1.57 trillion in assets under management as of December 2022.
Due to their long-term investment horizon, pension funds traditionally seek out long-term bonds and property as their preferred investments, with an eye on lowering the risk to protect retiree savings from erosion or loss.
Regulations by the Retirement Benefits Authority (RBA) allow up to 30 percent of a fund’s assets under management to be invested in Reits and 10 percent to be invested in infrastructure.
However, investment in Reits has been below one percentage point at 0.02 percent representing Sh283 million in 2022.
‘’Investment in alternative assets such as private equity and venture capital continued to be attractive to schemes due to their diversification effects, which increased by 4.78 percent during the period. Investment in Reits increased marginally from Sh268 million in June 2022 to Sh283 million in December 2022,” RBA states in an industry brief.
The low investment in Reits coupled with few existing publicly listed Reits at NSE has not been compelling for investors.
There are currently two listed Reits at the NSE, - unrestricted Ilam Fahari I-Reit and the most recent entry being the restricted Laptrust Imara I-Reit which was listed in March with a minimum subscription amount of Sh5 million.
Ilam Fahari I-Reit trades like an ordinary stock and is the only property fund to embrace retail/small investors having set a minimum investment amount of Sh20,000 when it listed in November 2015.
Laptrust set a minimum investment of Sh5 million for an investor. However, the Capital Markets Authority (CMA) is proposing to lower this to Sh10,000.
“Small schemes that cannot be able to raise the required capital to invest in land and building can own the same through Reit. A Reit makes it possible for a scheme to own part of a big mall or student houses across town,’’ added Nyakundi.
Investment in property by the pension industry was at 15.7 percent as of December 2022, with 13.6 percent of the funds in equities and 45.8 percent in government securities, being the biggest asset class for pension funds.
However, the valuation of bond holdings has been negatively affected by rising yields in the secondary market.
Over the past year, emerging and frontier equity markets such as Kenya have also struggled to compete with the likes of the US market, which has been offering investors higher rates on bonds with an added advantage of safety against the economic uncertainty that has gripped the global economy.
As a result, investors have recorded paper losses from holding government securities as the prices of bonds fell in tandem with rising interest rates.
Therefore, with the raising interest rates and falling stock markets, pensions are forced to look to other assets.
Pensions say the Reits will target to invest in affordable housing in all counties, with research showing half of the population will be living in urban areas by 2050.
The investment is set to benefit members by offering better returns. Reits, unlike bonds with volatile rates, will be providing a fixed and predictable return, says Mr Mulwa.
“We are starting with an investment aimed at least not less than two percentage points below the bonds points. So if bonds are currently at 14 percent, we are working to make sure that the Reits does not go below 12 percent,” adds Mr Mulwa.
“As a pensioner, you are a shareholder of the pension scheme. So whatever pension scheme gets is what you as an indivudual get, because returns are distributed equally to all pensions.”
Pensioners and by extension pension funds, stand to benefit from the diversification of the portfolio and returns, depending on the needs of the scheme whether to go for income -Reit or development Reit, adds Mr Nyakundi.
Alternative investments have raised concerns of illiquidity, as the property assets are not quickly converted to cash whenever funds are needed, a structure that could deny retirees their monies and fail to serve the needs of the members.
Mr Nyakundi, however, points to the different choices of investments.
“Listed Reits are less illiquid compared to a direct investment in property. A Reit that is listed can get another buyer at the NSE while a property must get a buyer which takes a lot of time with lots of paperwork. In a Reit if an underlying asset is of good quality Grade A, the returns are modest and easy to trade.”