REITs unlock doors to real estate

Commercial building under construction in Kisumu town. REITs are trusts focused upon the ownership of property.Photo.Tom Otieno 

By CATHY MPUTHIA

In Summary

• REIT allows investment in real estate without large capital and labour requirements.

Last year, the REIT regulations were finally gazetted, and this is likely to lead to a revolutionary change in the real estate sector.

A REIT is a real investment trust that is listed on the stock exchange, allowing investors to buy shares in listed companies that own property.

A REIT enables the public to buy unit trusts in limited companies and earn dividends from these purchases. It is an investment trust that owns and manages a pool of commercial property, mortgages and other real estate assets as shares are sold to the public and traded on the stock market.

REITS are therefore advantageous to the economy in several ways. Firstly, it enables investors diversify their portfolios. Not everybody can afford real estate property despite the fact that these investments are secure and yield high returns.

An investor who is not able to own real estate property can at least invest in this sector through REITS. The gain for the investor would be the dividends earned from his share and also capital gains that is made when he sells off his share later.

I expect that returns from the sale of REITs will be high as there is a lot of demand for real estate products. The REIT company is also charged with managing the real estate development, meaning that there is a lot of expertise in the way the investment is managed. This will also have a bearing on the level of returns for the trust.

A REIT is more liquid than the traditional real estate investment because it is easier to sell off your share in the unit trust as compared to selling of land. It is also cheaper in the long run as expenses related to real estate investment, for example, stamp duty which is currently at four per cent of the value of the property, do not apply with REITS.

Legal fees in terms of conveyancing costs are also not applicable when selling off your share. It is therefore a new way that the public can invest.

A REIT also has an advantage for real estate developers. It is now easier for them to access financing through the stock exchange. Previously financers were limited to only debt and equity An investor would either form joint ventures with persons with equity capital or take out a bank loan.

Both forms of investment were too expensive for the developers. Financing has been one of the greatest challenges for potential investors in the real estate sector. A REIT will enable developers’ access finance at a cheaper price.

As long as they have met all the requirements, then the only capital cost to the developer would be the listing costs. The investors who buy shares in the REIT are the ones who will provide most of the capital needed to undertake a real estate development.

This is a much cheaper and easier way of raising money for development. In the long run, this means that the real estate sector will grow and so will the economy.

Despite the regulations being licensed, very few managers have taken out licences to enable them list companies on the REIT exchange.

Further, I am not aware of any listed REIT despite the regulations being in place. The regulations have been in place for a few months but the market is taking a long time to respond. Time will tell how the market will respond and the overall effect of REITS on the real estate sector.

Ms Mputhia is a Partner with Muthoga Gaturu. cmputhia@mgmail.co.ke. www.mgadvocates.com