CMA loosens golden handcuffs for developers

James Karanja, executive director of Kenya Building Society, a subsidiary of Housing Finance during a media briefing on the Real Estate Investment Trusts (REITs) on July 2, 2013. Photo/DIANA NGILA   Nation Medai Group

By MOSES AKENA and GEORGE NGIGI

In Summary

• Capital Markets Authority has reduced the lock-in period for promoters of Real Estates Investment Trusts to two years, allowing them to exit projects earlier than three years published in an earlier proposal of the law.
• Promoters of investment REITs will be required to hold 20 per cent of the asset value listed at the exchange before being allowed to cut it to 10 per cent by end of second year and ultimately exiting.

The capital markets regulator has reduced the period that promoters of real estate investment projects will be barred from selling their shares at the stock market, winning praise from developers who said this would free-up their capital faster.

In new regulations gazette into law, the Capital Markets Authority (CMA) has reduced the lock-in period for promoters of Real Estates Investment Trusts (REITs) to two years, allowing them to exit projects earlier than three years published in an earlier proposal of the law.

Legal notice issued by the regulatory body states that promoters of investment REITs will be required to hold 20 per cent of the asset value listed at the exchange before being allowed to cut it to 10 per cent by end of second year and ultimately exiting.

This is a shorter period compared to that proposed in the draft regulations which required the promoter to hold 30 per cent of the assets which would drop to 20 per cent, then 10 per cent before a final exit.

“The promoter may, after the first year of the close or listing, reduce its holding to a minimum of 10 per cent and second anniversary of the close or listing, reduce its holdings to zero per cent,” reads the legal notice number 116.

The regulations retain the lock-in period of development REITs at two years with the promoter holding a minimum of 10 per cent.

An investment REIT allows transfer of ownership of existing property to the public while a development REIT is used to raise funds for new developments.

“We welcome it because if you lock them in for a long time, then you are preventing them from doing more projects,” said James Karanja, executive director of Kenya Building Society, a subsidiary of Housing Finance.

The sale of a piece of real estate project will unlock developers’ wealth, giving them liquidity to venture into other projects without necessarily mortgaging, at bank rates, their current holdings.

He also addressed concerns that exit of promoters could be read by the public as lack of confidence in the project and thus necessary to have them locked in till completion, arguing that promoters are not necessarily the main drivers of the project.

“Professionals such as project managers and structural engineers run the day-to-day operations so even if they get out, so long as the structures are right, the project will continue,” said Mr Karanja.

The REIT manager of the initial developments will be required to have completed 30 per cent of the project in an year after the initial offer so as to ensure they applied the resources mobilised from the public to ensure they are not used as a cashbox.

The minimum subscription for D-REITs has also been pegged high at Sh5 million with the regulator assuming that those targeted are knowledgeable investors able to analyse the project and the promoters’ credibility. There is no minimum subscription for I-REITs, which are offered to the public.

The managers of the I-REITs will however be required to ensure that it earns at least 70 per cent of its income from rent and license fees in each financial year after the second anniversary of its authorisation. They are also to pay out at least 80 per cent of their profits to the REIT holders.

Capital gains tax, however, hangs as a dark cloud over the success of REITs in the country with real estate players stating that its introduction may make it a less attractive investment option compared to government securities.