Investment bank pushes for automatic tax exemption for Reits

Real estate investment trusts (Reits) should receive automatic corporate tax exemption as soon as they list on the Nairobi bourse order to attract promoters.

Sterling Capital says uncertainty as to whether the Kenya Revenue Authority (KRA) will give the exemption – which is allowed under the Reits law – is a major hindrance to the development of the asset class in Kenya.

The upshot of the investment bankers’ argument is that a promoter is unlikely to shoulder the costs that goes with Reits unless they are sure that they will be exempted once they get listed.

“Some grey areas especially on matters to do with tax exemption make the potential benefits to potential promoters blurry. While exemption from stamp duty is anchored on law, corporation tax exemption has to be approved by the KRA,” said Sterling Capital research analyst Wangechi Njogu in a report.

“Corporation tax saving of 30 percent presents the most significant financial consideration to any would-be promoter and hence the need to make such exemption automatic upon listing.”

The other major obstacle to Reits promotion, Sterling Capital noted, is the restrictions on the amount of debt that is allowed for the asset class, even as the trend in real estate is the use of more debt than equity.

The maximum borrowing for a Reit is legally set at 35 percent, yet most real estate projects have 60 percent debt and 40 percent equity.

“Regulation 71 stipulates that the maximum borrowing capacity for an I-Reit (income or rent-based) is capped at 35 per cent of the total asset value. Typical capital structures for real estate projects in Kenya consist of 60 percent debt and 40 percent equity (60:40).

This means that a developer would have to undertake a private placement to bring the debt to equity ratio to within compliance levels which is an additional cost to listing,” said Sterling Capital.