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Understanding how Reits market works

Monday, July 23, 2018 18:44

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

Kenya is seeing significant growth in the real estate sector, driven by increased urbanisation that has in turn driven demand for housing to surpass supply in its three major cities, for example Mombasa, Nairobi and Kisumu.

In response, the government has invested heavily in infrastructure development, while taking steps to improve the legal and regulatory framework in key sectors of the economy.

It is against the backdrop of the enactment of the Capital Markets Real Estate Investment Trusts (Collective Investment Schemes) regulations 2013 that the Nairobi Securities Exchange became the fourth African bourse to launch the REITs market on October 22, 2015.

A Real Estate Investment Trust (REIT) is a collective investment scheme in real estate, structured as a trust where an investor owns rights or interests in property in form of units and earns returns from income or capital gains.

The company or trust thus pools funds from individual investors, acquires and operates income-generating real estate, and distributes the income derived from the properties as dividends.

In Africa, growth of the REIT market has been limited by the absence of enabling legislation. While there are risks associated with REITs in Kenya, there is a high level of justification for its introduction in the market due to the benefits associated with investing in them.

Some of the gains are the fact that REITs facilitate: access to investment in large scale real estate projects for individual investors, diversification, liquidity advantage over direct investment in privately traded underlying real estate assets, access to professionally managed portfolios, reduced development costs for property developers, tax advantages and limited legal liability for the shareholders of a tax qualified REIT, and a regular income stream for the investor via distributed dividends.

The efficiency of the stock market also tends to give REIT investors more protection against poor investment decisions. Additionally, REITs are known to own multi-property portfolios with a diversified tenant pool. This means one can invest in a diversified pool of real estate for a modest investment amount, rather than put money in an individual specific property.

Tax exemption status enjoyed by REITs translates into further advantages for the investor by avoiding double taxation of earnings incurred by corporate shareholders.

There are also risks associated with REITs which include; need for the investor to have adequate knowledge on both the stock market as well as property market in order to get the most out of their investment, valuation uncertainty, borrowing risks, economic and political environment, slow growth, occupancy rates and rents.

Some of the steps to mitigate the risks involved in REITs and enhance its development in Kenya include; public education, need for the land ministry to address challenges surrounding land ownership, cartels, issuance of title deeds, need for property owners and developers to raise funds through the capital markets, and the need for enabling legislation and policy changes required to propel REIT development.

But overall benefits listed outweigh the challenges faced. However, further research is needed to understand other countries’ REIT structures and regimes in order to tailor make solutions for our market.

RODGERS OBURE, CEO, Capital Land East Africa Ltd