Real Estate Investment Trusts (REITS) are regulated collective investment vehicles which invest in Real Estate. REITs promoters source funds to build or acquire Real Estate assets, such as residential, commercial, retail, mixed-use developments among others which they sell or rent to generate income. The income generated is then distributed to the investors as returns. The Real Estate assets are held by a trustee on behalf of unit holders and professionally managed by a REIT manager. There are three main types of REITs and they include:
- Income Real Estate Investment Trusts (I-REITs): This is a Real Estate trust that primarily derives its revenues from rental properties through rental income and capital appreciation form the investments undertaken,
- Development Real Estate Investment Trust (D-REITs): This is a type of Real Estate trust where resources are pooled together for purposes of developing of Real Estate projects, and,
- Islamic Real Estate Investment Trusts: This is a unique type of a Real Estate Investment Trust, which only undertakes Shari’ah compliant activities. A fund manager is required to do a compliance test before making an investment in this type of REIT to ensure it is Shari’ah compliant.
In 2013, Kenya became the third African country to establish REITS as an investments vehicle after Ghana and Nigeria who launched their REIT frameworks in 1994 and 2007, respectively. In the Nairobi stock Exchange (NSE), there are currently three REITs namely the ILAM Fahari I-REIT which was listed and started trading in November 2015, and, the Acorn Student Accommodation I-REIT and D-REIT which were launched in February 2021. The two Acorn REITs are not listed but investors can trade their shares over the counter through the NSE Unquoted Securities Platform (USP). Some of the benefits of investing in Real Estate Investment Trusts include; i) Competitive Long-term returns, ii) Avenue for diversification of investments, iii) Liquidity since an investor can buy and sell units/shares in the REITs any time and especially if they are listed, and, iv) Affordability - REITs offer the benefit of investing in large Real Estate developments at affordable prices particularly through the security exchange platform, as opposed to purchasing an entire unit or development.
Despite the numerous advantages offered, adaptation of REITs in Kenya has been slow. The REITS market capitalization to GDP in Kenya is less than 0.1% compared to more developed countries such as South Africa and Australia at 7.8% and 7.9%, respectively. The dismal performance of the REIT market in Kenya is attributed to various factors which include;
- High Minimum Capital Requirements for a Trustee of Kshs 100.0 mn: This essentially limits the eligible trustees to only banks, efficiently eliminating corporate trustees and other fund managers,
- High Minimum Investment Amounts Set at Kshs 5.0 mn: Based on the current regulations, the minimum investment amounts for a D-REIT is 5.0 mn, which is 100x higher than the gross median income of Kshs 50,000 in Kenya. This discriminates against many investors who need the benefit of regulated structures to protect their investments, especially in alternative asset classes markets,
- Lengthy Approval Process,
- Inherent conflicts of interests with Trustees: Due to the high minimum capital amounts, there are only 3 Trustees who are all banks. There have been instances where banks have asked for deposits in order to undertake the REIT Trustee work, this would be cured by enabling Corporate Trustees as is the case in the Pensions industry, and,
- Inadequate Investor Knowledge: The low popularity of the instrument is a major contributor to the low subscription rates and the consequent poor performance of the FAHARI I-REIT and the failed issuance of the Fusion D-REIT in 2016,
There have however been some activities related to REIT transactions done by foreign companies, notably from GRIT Real Estate Income Group who through Gateway Real Estate Africa Ltd (GREA) in January 2022 invested Kshs 5.5 bn to build a diplomatic housing estate in Rosslyn, and, in March 2022, invested Kshs 6.1 bn to acquire Orbits Products Africa, a warehousing complex in Machakos County. Given the two recent successful REITS transactions in Kenya in the first quarter of the year, by GRIT Real Estate Income Group, we expect more foreign nationals to show their interest in Kenyan developments with the worst-case scenario being dominating the REITS market in Kenya.
Real Estate Investment Trusts (REITS) have proven to be a viable investment option for investors as they have proven to be effective in encouraging people to tap into the Real Estate market. REIT as an alternative means for financing Real Estate projects can help plug the existing housing deficit and reduce overreliance on the expensive debt financing for developments while boosting returns for investors and developers. In Kenya, despite the REITS being in existence for more than nine years, the instrument remains subdued due to various factors among them being lack of investor knowledge. There is potential for growth of the instrument if reforms are made to favour the needs of investors, if the approval processes are aligned with well-defined timelines, and, if the public is sensitized in an aim to improve investor knowledge.