On October 22, 2015, Kenya’s capital markets launched the Real Estate Investment Trusts (REITs) after what seemed to be an eternity in having the product rolled out in the market.
Stanlib, an investment company, took the big leap into the property investment arena by launching Fahari I-REIT (Income Real Estate Investment Trust) targeting retail investors with as little as KSh 20,000 investment.
The I-REIT, which was launched on the Nairobi Securities Exchange (NSE), is aimed at enabling retail investors to take part in the ownership of property investments listed in the stock market. Its regulations were developed in 2013 with licensing of REITs managers and trustees underway during that time.
The REITs regulations introduced two types of investment avenues in the property market through the stock market. These are the development REITs (D-REITs) and investment REITs simply referred to as I-REITs, which Stanlib launched.
The objective of the D-REITs is to construct and develop real estate while the I-REITs focus on income-generating property such as rentals or those up for sale. The income REIT allows investors – whether retail or institutional – to pool financial resources for investment in a portfolio of revenue generating properties for profit. Investors gain by way of capital appreciation and rental income accruing from the property.
According to Stanlib’s regional director, East Africa, James Muratha, the I-REITs offers investors a window to invest in and claim a share of the earnings from Kenya’s robust and ascendant property market without having to directly buy property.
“Those who have tried or managed to invest in property in Kenya know that it can be quite a difficult, expensive and time-consuming undertaking. For starters, property investment has hitherto been limited to just one of two options: buy or build. Assembling the requisite expertise and most importantly, affording it to either build or buy efficiently and effectively can be quite challenging,” Mr. Muratha says.
The Fahari I-REIT has set the minimum investment by individual investors at KSh 20,000 while that by institutional investors has been capped at KSh 1 million. The Fahari I-REIT anticipates targeting properties with attractive rental income and capital gains offering investors exposure to a reliable and growing return over the long-term.“With an I-REIT, you do not have to be rich to own rental property. You get access to a wide range of income generating properties from shopping malls, office complexes, warehousing, residential, student housing and so on,” says NSE’s chief executive officer, Geoffrey Odundo.
The NSE became the fourth exchange in Africa (behind South Africa, Ghana and Nigeria) to launch a REIT market, coinciding with the launching of the Stanlib Fahari I-REIT public offer. South Africa has traded in REITs over the last decade, while Ghana has had access to the REITs market since 1994 and Nigeria since 2007.
According to Cytonn Investment analysts, the introduction of the first I-REIT in Kenya is an important step that, if well executed by the issuer and the regulator, will further deepen country’s capital markets besides giving access to retail investors seeking real estate exposure.
“Real estate investment in Kenya has always been out of reach from the retail individual. It has traditionally been done through one’s own development or through partnership with a developer to provide equity, which has required vast sums of money. The minimum offering of this REIT being KSh 20,000 will allow retail investors to access the returns available in this attractive sector, including both rental income and capital appreciation,” analysts observed.
Some of the other highlights of the REITs allow investors to reap the benefits of this asset class in a more transparent manner in terms of taxation. The I-REIT is exempt from corporate tax.“That means that the I-REIT income is not subject to the current 30 per cent tax on gross profits. This is a major benefit to the investors and recognition of the role of the I-REIT in the economy through resultant benefits such as job creation, regulating real estate pricing, unlocking capital, financial growth and lowering interest rates,” Mr. Odundo added. Equally, by law, at least 80 per cent of the earnings based on rental income are distributed to unit holders twice a year.
However, analyst point out issues in the REITs market that need to be addressed.
“We are yet to have confirmation on which assets Stanlib will be purchasing with the REIT proceeds and the yield expectations for each asset, in order to make an informed recommendation on participation. The expected 14 per cent per annum total return needs to be broken down into components of yield and capital appreciation. We would be buyers if the yield component was about 8 per cent per annum, with the balance of return coming from expected capital appreciation,” Cytonn Investment analysts stated.
Globally, the US has the world’s most advanced REIT market. Just like any other listed security, its future worth is determined by market dynamics.
By Joshua Masinde