Personal Finance

Reits best way to achieve Uhuru’s housing target

KISUM

Workers at a construction site in Kisumu. FILE PHOTO | NMG

cathymputhia_img

Summary

  • Reits are beneficial to developers as they enable them access larger pools of funds that would have otherwise been inaccessible. 

The Real Estate Investment Trust (Reits) Regulations were passed by the Capital Markets Authority sometime in 2013 allowing investors to invest in real estate.

The major attraction of a REIT is that it would allow otherwise smaller investors access to large scale properties as the investment operates in a pooled manner.

Though the uptake of Reits has been a bit low in the market, the first Kenyan issue earned a net profit of Sh108 million indicating that Reits are indeed a promising tool for real estate investment.

The current government has its Big 4 agenda where one of the pillars is to provide accessible housing and create about 500,000 new home owners. The Constitution and the land policy has provisions on equitable allocation of land resources.

A Reit is one of the tools that can be considered in actualising this goal. A Reitwould enable small investors’ access opportunities in real estate investment.

Reits are also beneficial to developers as it enables them access larger pools of funds that would have otherwise been inaccessible. 

Construction finance has been a long-term challenge for many would-be developers. Infact large construction projects are only undertaken by developers with financial muscle. An average construction project runs into the hundreds of millions of shillings, figures out of reach for many.

The options for construction finance are limited. Traditionally the most common form of finance has been debt from financial institutions. 

The developer may take out a loan and issue alternative security or in most cases, secure the land on which the development is undertaken. The income from the development is then used to service the loan. Repayment of the loan is pegged on the sales.

READ: How State plans to deliver 500,000 homes in five years

The risk from debt financing is very high due to the fact that the income may be uncertain. 

Equity finance has also been used though most landowners are sceptical of this option due to the fact that there is an element of dilution of ownership.

Real estate developers have been presented with a new alternative to construction finance through the Reits. 

Once all the regulatory approvals are passed, then the Reit can access funds from the public. The schemes may be listed whereby the public is invited to invest in them. 

The infamous land buying companies of the 1990s were a loose form of Reits in that investment into real estate was done through a pooled fund.

The promoters would form a land buying company and invite persons to subscribe in its shares with the promise that the company would acquire a large tract of land and thereafter subdivide portions for the benefit of the shareholders.

More often than not the subscribers ended up losing their money to the promoters. However, the Reits are heavily regulated by the Capital Markets Authority (CMA) and it is difficult for an investor to lose his investment due to fraud or such other misrepresentations.