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Why real estate investment trusts hold growth potential

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Qwetu Hostels in Nairobi’s Ruaraka area. PHOTO | AFP

Summary

  • If you are looking for an opportunity to invest and diversify your income this year, it is time to consider pumping your money into the REITs segment.
  • Global statistics show that REITs have been able to outperform various asset classes consistently.
  • By owning units in REITs, you automatically become a landlord.

The economic outlook for this year looks positive with prospects of job growth and higher incomes as the country recovers from the economic downturn resulting from the Covid -19 pandemic.

If you are looking for an opportunity to invest and diversify your income this year, it is time to consider pumping your money into the REITs segment.

REITs (Real Estate Investment Trusts) were first established in 1960 by the United States Congress to give all investors, especially small ones access to income-producing real estate.

For the first time, REITs brought the benefits of commercial real estate investment to regular Americans – benefits that previously were available only through large financial intermediaries and to wealthy individuals.

Other countries followed suit, with Australia listing the first property trust in 1971. Canada waited until 1993 while the UK established REITs in 2007.

In Africa, the first country to establish REITs was Ghana in 1994. They have since gained traction globally and today, the market capitalisation stands at $1.7 trillion. Since 2013, seven countries that include Kenya, South Africa, Saudi Arabia, India, Vietnam, Bahrain and Ireland have established the property market.

Global statistics show that REITs have been able to outperform various asset classes consistently. As at December 2021, REITs performance was up by 29 per cent, and since the Covid-19 pandemic, the total returns globally have been in excess of 20 per cent.

In Kenya, there are currently 10 licensed REIT managers by the Capital Markets Authority (CMA). REITs are big landlords, and the rent collected is professionally managed and invested to meet operating expenses and the surplus is considered as net operating income from, which investors are paid dividends.

By owning units in REITs, you automatically become a landlord.

Your peace of mind is pegged around the fact that the properties are in the hands of expert fund managers who understand the real estate market. Simply put, REITs allow individuals to earn rental income without the stress of building real estate, and the attendant pain of maintaining the property and managing tenants.

The safety of your investment is also guaranteed as REITs are licensed and governed by the Capital Markets Authority (CMA) and the Retirement Benefits Authority (RBA).

They are also overseen by a board of trustees or directors, a custodian is appointed to manage the investments, while a property manager supervises the leasing and maintenance of properties.

Acorn Investments, has, for example, introduced a unique offering in the market by developing a REIT around student accommodation, the Qwetu hostels. This is currently the only student accommodation REIT in Kenya. Offered to retail investors, the investment vehicle for the hostels is known as Vuka investment.

Investors have an opportunity to invest through the ASA iREITs-(Acorn Student Accommodation Income-REIT) through a low fee of Sh4,500 per month. This is also offered in different categories ranging from Sh50,000 per year all the way to Sh1 million-plus for high-net-worth clients.

The return on investment on REITs ranges from between eight and 12 per cent per annum with the power of compounding being applied when you reinvest returns.

Some of the benefits of investing in REITs include diversification, offering an avenue to venture and diversify into real estate without the pain of construction, sourcing for capital, managing tenants and maintenance.

REITs are easily convertible into cash compared to when an individual or group wants to liquidate land or building. Liquidity is available as the REITs trade in the NSE USP (unquoted security platform)

REITs have the advantage of investing in real estate projects or income-generating properties such as malls, residential buildings, student accommodation and infrastructural projects, health care projects and so on.

Currently, REITs are available to both retail and institutional investors fashioned as income or development REITs. Income REITs are invested in income-generating properties which give a return component of dividends and capital gains.

Development REITs are invested in development projects and are mostly preferred by institutional clients.

Currently, REITs are tax exempted in Kenya but the dividend earn is subjected to five per cent withholding tax for residents and 10 per cent for non-residents.

The writer is the general manager, retail investments at Acorn Investments Ltd

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