In 2015, the Nairobi Securities Exchange made history as the third-largest bourse in Africa to introduce Real Estate Investment Trust (REIT) in its fold. This followed the historic approval of Kenya's first REIT by the Capital Markets Authority (CMA). This first REIT was offered by Stanlib Kenya, a unit of the Johannesburg-based Standard Bank Group. The initial public offer of the Stanlib Fahari Income-REIT (I-REIT) was opened in October 2015.
The I-REIT was expected to draw multitudes of local investors by offering them an opportunity to participate in the development of affordable houses. Investors were supposed to buy a minimum of 1,000 units at Sh20 per unit. The lowest amount an investor could invest in the I-REIT was Sh20,000. Stanlib was looking to raise a maximum of Sh12.5 billion which would finance the purchase of properties in Nairobi and Mombasa. In the market, the offer was met with investor apathy. Many investors did not know what a REIT is or how it worked.
Six years later, more corporates have come out to issue REIT to investors under the promise of investing in real estate projects. One of the latest is Acorn Investment's Income Real Estate Investment Trust (ASA I-REIT) which is being pushed under the brand Vuka Investments. This REIT says that investors will be allowed to own a piece of real estate housing project that is targeting student accommodation at a low fee of Sh4,500 per month. This is also offered in different categories ranging from Sh50,000 per year to Sh1 million and above for high-net-worth investors. Like all previous and upcoming REITS, the Vuka REIT has left many people wondering REITS are worth buying, the risks involved, and above all, what they are and how they operate.
According to economic analyst and consultant Jason Kinyanjui, REITs is a collective investment scheme that invests in real estate assets. "In Kenya, REITs are structured in either of two ways, a Development REIT (D-REIT) or an Income REIT (I-REIT). For instance, the offer by Stanlib was an I-REIT which was meant to raise capital to purchase already income-generating real estate assets," he says. "D-REITs are meant to raise capital to develop real estate assets."
While I-REITs are unrestricted and can be sold to the public, D-REITs are restricted and can only be sold to professional and targeted investors. According to investment analyst and the founder of Abojani Investments Robert Ochieng, D-REITs have a high minimum investment of up to Sh20 million and a lock-in period of five to seven years. "They are offered to pension schemes, charitable trusts, SACCOs, corporates, and fund managers," he says.
I-REITs have a minimum investment of Sh5,000, have no lock-in period, and are tradable in the NSE, which assures quick access to funds. I-REITs are offered to individuals and small groups such as Chamas. The growth of the REITs market is largely driven by the huge gap in housing in Kenya. Kenya has been estimated to have an annual housing demand of 250,000 units with an estimated supply of 50,000 units, culminating in a housing deficit of two million units.
REITs are noble investment channels for investors who have a long-term approach. These are investors who would be content with collecting dividends ranging from 8 to 12 percent. "These investors will enjoy consistent annual dividends as rental income from the purchased property will be distributed to the investors," says Kinyanjui.
According to Ochieng', REITs are a great way of diversifying investment. "Within real estate, REITS allow entering into housing at an affordable minimum for all investors," he says. Once you invest, it will not only be easier for you to access transparent information about your investment but also get consistent income. I-REITs are required by law to payout at least 80 percent of their income to unitholders in the form of dividends. This creates a stable and consistent source of passive income," says Ochieng. Unlike physical land or buildings, REITs allow an investor to buy units instead of the entire property, making it easier for an investor to sell the units wholly or partially as they are tradable at the NSE. Ochieng also says that REITs are exempt from corporate taxes, capital gain tax, and stamp duty. "This allows more income to be available for distribution. However, upon payment of dividend, the dividend income is taxed at 5 percent for residents and 10 percent for non-residents in Kenya," he says.
According to Kinyanjui, one of the key risks investors will have to bear is in the ability of the REIT manager to conform to REIT regulations, failure to which they will fall out of favour of their income tax exemptions. Also, at least 75 percent of the money raised will need to have been used to purchase eligible properties within two years. A key concern among potential investors should be the strength of rental income from the property. "Statistics have been indicating that there is an oversupply of commercial property that might slow down the growth of rental income," Kinyanjui says. He adds that the I-REIT could invest a maximum of 25 percent of the total asset value in fixed deposits or treasury bills. Additionally, the I-REIT can borrow a maximum of 35 percent of total asset value to invest and, or purchase more property with a provision to push it to 40 percent. "However, the additional debt must be cleared within six months," he says.
The Central Bank of Kenya has invited bids for a Sh75 billion infrastructure bond. To invest in this bond, you will need a minimum of Sh100,000. The bond will be tax-free and has a term of 19 years. You have until February 15 to invest. To invest, you will need a CBK CDS account which your investment banker can assist you to open.
