When you buy or build a four-bedroom villa in a place that has yet to develop, it is a no-brainer that after four to five years, the population will grow, and more structures will emerge in the area. Assuming the property was valued Sh30 million at the time of purchase or construction, you can make between 20 percent and 30 percent when you sell it after five years.
This is why it is better to buy early, or build early, and wait for the value to go up – but, even then, that is easier said than done. One of the arrangements that ought to give investors food for thought, and one that will ensure increased opportunities in real estate business is equity release schemes.
In simple terms, equity release is a plan to enable an individual to borrow cash tied up in a property without selling it. With equity release, you are not only able to enjoy a reduction of tax on income while servicing the loan but also free up cash that can be invested in other things.
All you need to do is present a property of your choice to a lender and obtain cash equal in value. It is a scenario where a lender – creates a ‘charge’ to show that it has lent out money to be paid over a long period. Once that facility is paid to the letter, the property is released to the buyer. If you own the property 100 percent, you can opt to sell it for profit and invest elsewhere or repeat the circle.
Another path that investors can pursue to create wealth through the real estate business is mortgage refinance. Currently, residential rents in the high-end and upper-middle-income segments appear to be slow due to low uptake. This means institutions and individuals are facing the challenge of cumulative high prices that our industry has witnessed over the past few years. This is where mortgages come in.
It is possible to create income through mortgages. The advantage here is that each mortgage payment usually includes a portion that goes toward the principal, thereby acting as ‘forced’ savings. So, as you pay down your mortgage, you are also building equity in your home, which can be a valuable asset in the future. You can use the savings (equity release) to invest in other projects.
Between 2017 and 2018, the national government saw a gap in the real estate market, especially in terms of home ownership, and established Kenya Mortgage Refinance Company (KMRC) to provide loans to primary mortgage lenders such as banks, Saccos as well as regulated micro-finance institutions for onward lending. KMRC disclosed that it has so far disbursed over 3,300 loans to home buyers in Kenya. However, it still appears that there is a housing shortage and a weak mortgage market. This begs the thought of the opportunities that the real estate business can offer.
On the demand side, the national government hopes to increase the number of mortgages to more than one million from less than 30,000 every year by enabling low-cost mortgages of less than Sh10,000 a month. What this brings out is that there is a remarkable gap that institutions and individuals can fill. This is where a mortgage comes in handy. Before you opt into a mortgage, though, ensure that the property you are set to buy is valued correctly. Also, do your due diligence so that you are not exposed to risks. There are scenarios where investors have rushed the process only to find that the owner of a property they intend to buy, lacks an original title or the property was once public land.
As a real estate professional, always vouch for investment options with a long-term window of maturity. A collective investment vehicle like a Real Estate Investment Trust (REIT) allows individuals or companies to contribute cash towards the acquisition of rights or interests in a trust that is divided into units with the intention of earning profits or income from real estate as beneficiaries of the trust. For starters, there are three main types of REITs to consider.
Development REIT, popular as D-REIT, is a type of REIT where investors pool their capital together for purposes of acquiring real estate to undertake development and construction projects and associated activities. Income REITs (I-REIT) are where investors pool their capital for purposes of acquiring long-term income-generating real estate including housing, commercial, and other real estate. Islamic Real Estate Investment Trusts, on the other hand, are a unique type of REIT that only undertakes Shariah-compliant activities. A fund manager is required to do a compliance test before investing in this type of REIT to ensure it is Shariah-compliant.
REITs offer investors enhanced liquidity compared to direct ownership of real estate assets as one is able to easily buy and sell units in a trust which has invested in real estate assets. There is also the aspect of a consistent income stream. REIT structures specifically income REITs are mandated by the law to distribute at least 80 percent of their net profits after tax to their unit holders as dividends. This provides a stable and consistent income to unit holders.
Additionally, REITs enjoy various tax considerations making them an attractive asset class for investors. REITs are exempt from income tax except for payment of withholding tax on interest income and dividends. Equally, REITs are exempt from stamp duty, value added tax as well as capital gain tax in some instances.
Pooling of funds is another relatively good option that newer individual or institutional investors looking to tap into the real estate market can explore. This approach means you can pool resources with like-minded people, enabling access to projects that typically require a lot of capital. Crowdfunding reduces the high barriers to entry, enabling you to diversify your portfolios.
Another prime investment opportunity exists in master-planned estates, a concept where a developer acquires huge acres of empty, but usable, land, and sells a portion of the same to institutions and individuals to build high-quality homes. This aims at creating These planned homes, in turn, present big opportunities as they lead to the creation of schools, retail centres and convenience stores, car washes, swimming facilities, and even churches.
Success in Kenya’s real estate sector will depend on all stakeholders from government to non-governmental organisations to companies and individual investors. We must all come together and ensure that industry is providing economic growth and financial stability.
