Personal Finance

Reaping from real estate even when you do not own land

real-estate

Summary

  • Most people would not hesitate to spend their entire savings on a piece of land even when they do not have an immediate use for it.
  • The majority of Kenyans who own land want to put it under real estate development because it is presumed to be a great and long-term investment plan with immense returns.
  • The opportunity to invest in the real estate sector for the discerning investor is now a reality through Real Estate Investment Trusts; popularly known as REITs.

The allure by Kenyans to own land they can call their own is almost like an obsession. Be it the 50 by 100 metres piece in Joska or Kamulu, or the ubiquitous ranch in Nanyuki or Kilifi, Kenyans are just obsessed with the desire to own land.

This phenomenon is a truism that has manifested itself throughout the country; both in the urban areas and in the counties. It seems to be the ultimate goal for most people who would not hesitate to spend their entire savings on a piece of land even when they do not have an immediate use for it.

The majority of Kenyans who own land want to put it under real estate development because it is presumed to be a great and long-term investment plan with immense returns when compared to other forms of investment. A larger number of other Kenyans just want to buy land and watch it appreciate over time and dispose it off at a profit at the appropriate time.

Numbers do not lie. About Sh1 trillion in capital is tied up in land in Nairobi. Another Sh12 trillion in capital is tied up in land in Nairobi, Kajiado, Machakos and Kiambu. The figure for the rest of the country could be mind-boggling. Direct real estate investment comes at the high cost of purchase, ties up capital for long periods, and does not provide liquidity in time of need.

Every investor seeks a real estate investment that is profit-making and has a return on investment (ROI). However, this option is rarely available, with real estate options requiring time to build, rent and generate profit. Throw in added and hidden costs of rent default, security costs, repairs, etc and you will find that the investment might not be as lucrative as it looks.

The big question is, is there any way Kenyans can invest and earn good returns from real estate even when they do not necessarily own land or buildings? And even if they own land, can they still be able to invest in this lucrative sector without mobilising a lot of capital?

The opportunity to invest in the real estate sector for the discerning investor is now a reality through Real Estate Investment Trusts; popularly known as REITs.

A REIT is a regulated investment vehicle that allows investors to pool funds collectively for the acquisition of units in trust with the intention to earn income from real estate without actually owning, buying, or financing the property. REITs can address some of the real estate sector challenges by enabling developers to access capital that can facilitate growth at competitive rates, thus enabling them to channel resources to real estate investments.

REITs allow an investor to buy units rather than the entire asset and it is easier to sell these units wholly or partially as they are tradable.

REITs are an attractive investment choice as they enhance liquidity by enabling investors to have easier entry and exit points in real estate investment. They also provide higher yields and are preferred by investors because of their ability to offer higher yields and risk-adjusted returns compared to other asset classes.

Investors are also able to understand exactly what they are invested in, in terms of actual assets, costs and returns.

When a REIT holds real estate that is in high demand, the regular rent escalations mean that the value of the investor’s units will grow in value as the rents appreciate.

REIT units can also be easily bought or sold. Investors do not have to deal with the complexity of selling a physical property as is normally the case.

For example at Acorn, we launched Africa’s first Student Accommodation REIT, giving investors the opportunity to get into the lucrative student housing market. The opportunity is now available to both individual and corporate clients looking for investment portfolio diversification through Vuka, an investment club approved by the CMA allowing investors to own units of Acorn’s student accommodation investment.

Through its digital platform, Vuka connects investors to owning profitable real estate through trading on the NSE’s USP. REITs are also required by law to payout at least 80% of their income to unitholders in the form of dividends. Consequently, they generate a stable and consistent income stream for investors. They are thus ideal for investors looking for capital gain appreciation while offering attractive returns.

Investors have the added advantage of improving their saving habits while growing their wealth, allowing them to buy units for wealth accumulation in the medium and long term.

The other advantage of this type of investment is that in times of need or emergency, an investor is allowed to liquidate his investment by selling or withdrawing their savings, something not possible with direct real estate.

Njeri Ndirangu, is the General Manager, Retail Investment at Acorn Investment Management Limited.