REITs: A Lucrative, Alternate Investment in Kenya’s Real Estate Sector
A Real Estate Investment Trust is a company that owns and operates income-producing real estate. The real estate is in form of apartments, offices, warehouses… and the likes! REITs have no barriers to entry associated with traditional property ownership and they move similarly to asset-backed vehicles.
REITs are regulated Collective Investment Schemes where REIT managers source funds to build or acquire real estate assets, which they sell or rent to generate income. The income is then distributed to the investors. The property is held by a trustee on behalf of a unit holder and professionally managed by a REIT manager.
About the establishment of REITs in the Kenyan market, the CEO of the Nairobi Securities Exchange, Mr Geoffrey Odundo, had this to say: “The introduction of REITs in Kenya was an innovative approach to enable property owners/developers to address financial constraints that restrict the access to this asset class and offer investors with a matched opportunity to access real estate developments.”
There are two types of REITs: Equity and Mortgage REITs. Equity REITs are managed by trusted property managers who operate the day to day needs and requirements of the property. 80% of the REITs in Kenya are Equity REITs. Mortgage REITs lend money to the owners and they have no direct ownership.
Speaking on lessons learnt from fundraising, feedback and the future of REITs, Mr Raghav Gandhi, CIO Acorn Holdings Limited, noted, “Globally, REITs are the ideal vehicle for investments by institutional investors in real estate and so, they present the perfect opportunity in Kenya towards institutionalizing investments in real estate.”
He further noted that the success of this asset class is pegged on continuous engagement amongst all stakeholders including regulators, developers, media and the exchange with a view to demystifying the risks, rewards and opportunities for potential investors.
Kenya has three types of Equity REITs: Income REITs which manages operates income-producing assets; Development REITs which manages development projects, and Shariah REITs that are compliant with Islamic finance.
There are several factors that make REITs an attractive investment vehicle. The first is that REITs are not subject to pay income taxes to the government (yet). Secondly, they offer a very tightly regulated framework and carry with them a lot of transparency due to high corporate governance standards. Lastly, they offer different regulations across different jurisdictions.
It’s not all rosy, however, REITs do present an equity market risk with certain growth constraints and a cap on leverage. But with that being said, REITs is a promisingly new market that’s pointing to massive potential that offers greater comfort when left to the professionals and presents a source for patient long-term capital gains.