Real Estate Investments Trust (REITS) - an investment opportunity for every Kenyan

I wrote this for Dream Properties Ltd, website first published on 5 June 2013

 

Good news for those of us who've been trying to get a foot in the door in the Real Estate Market. With good reason too; Kenya's property values are on an upward trend towards becoming among the best in the world. Interest rates for developments are on the high, rents have increased by as much as 3.8% and there's still room for growth as the middle class increases and the lower segment seeks better housing.

 

Investing in income-generating real estate can be a great way to increase your net worth. In come REITs, (pronounced:reets) or Real Estate Investment Trusts. Simply put, REITs are corporations that own and manage a portfolio of real estate properties and mortgages. Anyone can buy shares in a publicly traded REIT. Trading will be regulated by the CMA (Capital Markets Authority). They offer the benefits of real estate ownership without the headaches or expense of being a landlord or property developer.

 

The CMA has been pushing for establishment of public REITs in Kenya for years and we might see this come to fruition, following in the footsteps of South Africa, Ghana and Nigeria in the African Market.

Why Should You Be Excited?

• The biggest advantage of REITs is that they are exempt from Double Taxation: no corporation tax, no VAT on rental income or on professional services, no capital gains tax, no stamp duty on purchase/sale/transfer of properties and no income tax. The only tax burden will be withholding tax on interest income and dividends. But, of course we'll see early on if the CMA ensures the KRA sticks to these incentives.
• Another is REITs will enable mobilizaton of savings from individuals and groups, i.e. you as an individual can invest sums as low as Ksh. 5000 depneding on the structure of the REIT ofcourse and your chama can invest even larger than that.
• Developers will be able to go to the CMA for funding which means lower interest rates for developments i.e lower mortgage rates for you as a buyer after banks follow suit and review their rates downwards.
• Liquidity; unlike actual real estate property, these shares can be quickly and easily sold.
• Diversity; because you're investing in a portfolio of properties rather than a single building, you face less financial risk.

Types of REITs

There are different types of REITs:

Equity REITs purchase, own and manage income-producing real estate properties such as apartments, malls and office buildings. Equity REITs are different from typical real estate developers because they purchase or develop real estate to operate it as part of their portfolios instead of developing it for resale. Equity REITs are considered superior for the long-term investing because they earn dividends from rental income as well as capital gains from the sale of properties.

Income REITs primarily owns properties that are net leased to single tenants.

 

Mortgage REITs loan money for mortgages to real estate owners or purchase existing mortgages or mortgage-backed securities. Their revenue is generated primarily by the interest that they earn on the mortgage loans. Mortgage REITs react more quickly to changes in interest rates than equity REITs because their dividends come from interest payments.

 

Development REITs specialised in producing more Residential Properties that are in short supply.

 

Hybrid REITs are a combination of two types of REITs (Income and Development or Equity and Mortgage). They both own property and make loans to real estate owners and operators. Hybrid REITs earn money through a combination of rents and interest.

The proposed framework in Kenya is to use the Hybrid model which comprises of Income REITs and Development REITs.

Expected Structure of REITs

Each country has it's own framework by which REITs are operated, what we expect in Kenya (subject to change) is:

• Listing on the NSE as close-ended trusts. (Closed-end, it can only issue shares to the public once and can only issue additional shares, which dilutes the stock, if current shareholders approve it. Open-ended REITs can issue new shares and redeem shares at any time.)Development property should be restricted to 15% of the REIT value, this helps restrict the risk that coomes with developing property.
• Majority ownership will be allowed up to 50% for the primary sponsor. All other investors stake should be restricted to a maximum of 25%
• A minimum of 100 shareholders will be required for a publicly listed REIT to help ensure liquidity.
• 90% of the income shouldbe distributed to shareholders as dividends
• The CMA is also expected to set the minimium value of a publicly listed REIT to Ksh. 50M for low-medium cost housing and Ksh. 500M for high-end housing/non-residential properties.

As a smart investor you need to check out a few things before jumping in on the bandwagon:

• The area of the investment: some things just won't work, like building a high-end mall in a low-income area, so be smart, consider the demographics.
• Remember past performance is no guarantee of future performance, so look past initial dividend payments. At the end of the day, investing is still risky business, it could go up, it could go down.
• Be wary of high yields. If there have been excessive capital gain distributions, this can be a sign that the income is coming from nonrecurring events and will not continue for long. Make sure the REIT is not selling off properties to provide income, because future rental income will be affected.
• Consider what you're looking for; REITs can provide both current income and long-term opportunities.
• Due diligence checks including checking out the REIT's management, professionalism, integrity etc.
  

So, eager investors, keep your eyes out for this, it might just prove to be a great opportunity.