Why Reits are not contributing enough to affordable housing

The daily rural-to-urban migration has led to the growth of informal settlements with little or no improvement in social amenities such as water, drainage and sewerage systems.

Since 2017, there have been efforts by Kenya to develop and promote the development of affordable housing projects countrywide.

Despite real estate investment trusts (REIT) rules having been effected over a decade ago, REITs are yet to significantly contribute to development of affordable housing.

A REIT is a regulated investment vehicle, which enables collective investment in real estate, where investors pool their funds with the intention of earning profits or income.

While REITs enjoy special tax treatment in Kenya compared to other investment vehicles, there are only a handful of real estate players who have dared to venture into this space. This tread-with-caution attitude is attributable to several factors.

First, while REITs enjoy tax benefits, the Kenyan tax regime is unpredictable with tax statutes being amended every year as part of the annual budget-making process. The uncertain tax benefits result in a lack of motivation for a commercial decision to venture into REITs, especially considering other specific requirements applying to REITs.

Second, there is a marked lack of information and understanding on REITs. As a result, most investors go for the tried and tested options such as limited liability companies.

Third, a Kenyan REIT requires a promoter, a trustee and a manager. The trustee and the manager must meet certain criteria. For instance, a REIT trustee must have a minimum paid-up capital and reserves of Sh100 million while a REIT manager must have a paid-up share capital and reserves of at least Sh10 million.

Given this, together with compliance with other legal requirements, there are few licensed REIT trustees and REIT managers in Kenya and the cost of hiring their services can be prohibitive for those who opt for a REIT as an investment vehicle.

Further, under Kenyan law, a development REIT should have a minimum of seven investors with at least 25 percent of the REIT being owned by people who are not related to the promoter (founder). Since Kenyans prefer to invest in real estate either alone, with family members or those they are familiar with, REITs are an unattractive option.

Minimum investment and asset value requirements are also a deterrent. For example, to be registered, a development REIT must have a net asset value of at least Sh100 million while an income REIT must have a net asset value of at least Sh300 million.

Additionally, the fact that a REIT is a relatively new concept in Kenya could explain why many people have yet to embrace it as an investment vehicle. While Kenya has for decades had laws on companies and partnerships, REITs regulations, which are the main legal and regulatory framework for REITs, were only promulgated in 2013.

An average Kenyan would prefer direct ownership of real estate to other forms of investment. While a REIT caters for investment in real property, it does not provide direct ownership of property to investors who are only entitled to units which are the equivalent of shares in a company.

Given that the affordable housing initiative is still in its initial stages in terms of units delivered, the government should consider bringing REIT stakeholders such as the REITs Association of Kenya onboard to play a role that complements government efforts to promote a better understanding of the REITs offering as an investment vehicle.

The government should also come up with predictable tax policies so that investors are confident of what tax benefits they stand to enjoy and for how long should they opt for a REIT as an investment.

As a real estate investment vehicle, REITs can make an invaluable contribution in addressing the persistent affordable housing deficit in the country and this potential is yet to be fully tapped.

Amrit Soar is a consultant in the Real Estate and finance Practice at DLA Piper Africa Kenya (IKM Advocates) and Josphat Nthata is Associate, IKM Advocates.