The risks and rewards of betting big on REITs

On October 2, 2015, the Nairobi Securities Exchange made history as the third largest bourse in Africa to introduce real estate investment trust (REIT) in its fold.

The investment vehicle was offered by Stanlib Kenya, an arm of the Jo’burg-based Standard Bank Group.

The initial public offer of Stanlib’s Fahari Income-REIT (I-REIT) opened on October 22 and was expected to run until November 12.

It was billed to draw thousands of local investors with the magnet being a chance to start reaping big from the booming real estate sector.

The minimum units investors can buy have been set at 1,000 for Sh20 each.

This means that the lowest amount one can invest is Sh20,000.

Further, the Fahari I-REIT allocated regional institutional investors 55 per cent of the offer while their foreign counterparts took up a 20 per cent.

Individual investors were allocated 25 per cent stake.

Stanlib has been looking to raise a minimum of Sh2.6 billion and a maximum of Sh12.5 billion.

Already, the International Finance Corporation said it will be investing Sh1.5 billion in the offer.

Interestingly, the Stanlib fund will invest a minimum of 75 per cent of the funds raised in property.

Stanlib Kenya real estate unit CEO Anton Borkum said the Fahari I-REIT will finance the purchase of Sh2.5 billion properties by the end of this month, offices in Nairobi, a shopping centre in Mombasa both valued at Sh7.5 billion; warehouses, an office park and a second shopping centre in Mombasa all valued at Sh3.5 billion.

WHY FAHARI I-REIT FALTERED 

Since the opening of the offer, however, Stanlib’s I-REIT has witnessed investor apathy.

So severe was the lack of investor appetite that last week, Stanlib extended the offer by one week.

Subsequently, the Fahari I-REIT will now be listed on the bourse on November 26 under the Unrestricted Main Investment Market Segment.

REITs is an investment scheme that pumps money into properties, says Mr Paul Maina, the head of research at Relic Capital.

“In Kenya, REITs are structured in either of two ways, a development REIT or an income REIT. The offer by Stanlib is an I-REIT, meaning it seeks to raise capital to purchase income generating real estate assets,” he says, adding: “development-REITs on the other hand are meant to raise capital to develop real estate assets.”

While income-REITs are unrestricted and can be sold to the public, development-REITs are restricted and can only be sold to professional investors, he notes.

Strikingly, even before Stanlib could clear the fog blocking investors, it announced that it will be seeking to hold rights issues once every two years to finance the acquisition of commercial and retail properties.

Mr Maina, however, faults the product’s pricing. “The pricing was awfully set. The marketing was not well done, with many of the novice investors’ questions still unanswered on the I-REIT. The Stanlib I-REIT seeks to raise Sh12.5 billion by issuing 625 million units priced at Sh20 each,” he says.

“They could have issued 1.25 billion units and priced them at Sh10 each. In our case they are issuing 625 units at Sh20 each. They should have restructured to a lower price not value. The price per share for most IPOs done in the last few years has been sub Sh12 price.”

HOW FAHARI I-REIT WILL OPERATE 

According to Investax Capital boss Ndindi Nyoro, the REIT units will operate more like shares and the price will be driven by market forces.

“The minimum guaranteed return is 14 per cent per year. This, though, excludes capital gains if the unit appreciates,” Mr Nyoro says.

Sterling Capital analyst Eric Munywoki says Fahari I-REIT is a close ended fund: “The trust will not redeem units, and therefore, investors will only exit by disposing of their units in a secondary market based on the existing market’s value per unit.”

Nonetheless, Fahari I-REIT has been recommended as a long-term buy.

The buy recommendation is based on a fair value estimate of Sh23.10 per unit, which represents a 15.5 per cent prospective gain from the current offer price of Sh20 per unit.

Buyers will be cushioned against inflation with rent escalation rate of between 6 per cent to 7.5 per cent being above the 6.72 per cent inflation rate, notes Mr Munywoki.

“Due to the potential leverage of up to 35 per cent and a 2.9 per cent property expense, this REIT will have a dividend yield of 2.7 per cent in its first year, and will possibly improve this to 4.5 per cent in the subsequent years,” says Mr Munywoki.

WHO SHOULD INVEST?

Investment expert and CEO of Canaan Capital Rufus Mwanyasi says REITs are especially noble channels for investors who have a long-term plan.

“Through REITs, investors will diversify, achieve higher dividend, liquidity, transparency and performance,” he notes.

Mr Maina adds that investors seeking consistent annual dividend should go for I-REITs. “Rental income from the purchased property will be distributed to the investors,” he says.

According to Mr Maina, however, investors will have to bear with is the ability of the REIT manager to conform to the set rules failure to which they will fall out of favour.