Former Fusion Group chief executive Luke Kinoti (left) and China Wu Yi
deputy manager Xion Kaihua during the launch of the first D-REIT in the
Kenyan market in June 2016. FILE PHOTO | NMG
That President Uhuru Kenyatta has put the provision of affordable housing among his ‘Big Four’ plans is laudable.
Accessible
and adequate housing is one of the key pillars of the Bill of Rights
enshrined in the Kenyan Constitution. Kenya suffers a huge deficit of
affordable housing, mostly due to high prices of land.
In
the third medium term plan (MTP III), the government has committed to
delivering 500,000 housing units by 2022, mostly in major cities across
the country. The Treasury, in the 2018 Budget Policy Statement, has
outlined five key strategies to actualise this ambition.
First
is by reducing corporate tax rate for developers who construct at least
100 housing units in a year. Second is strengthening the National
Housing Corporation’s ability to finance low-cost housing by creating a
National Social Housing Development Fund.
Third is to establish the Kenya Mortgage Refinance Company, a
public private partnership aimed at raising long-term funds from capital
markets for the purpose of extending long-term loans to financial
institutions secured against mortgages.
Fourth is to
enhance initiatives to upgrade slums and informal settlements. Lastly,
to review the National Construction Authority Act and to enact the Built
Environment Bill to create sustainable building standards, design
procedures and green building codes for the sustainability and safety of
the housing sub-sector.
All the proposed initiatives
are commendable. However, a product with huge potential that is
regrettably missing from the government’s strategy is the real estate
investment trusts (REITs), which could be very instrumental in
actualising the affordable housing goal and promoting financial
inclusion. It has numerous advantages over other proposed plans.
The
legal framework for REITs is available. In 2013, Kenya became the third
African country to establish REIT as an investment vehicle by making
the Capital Markets (Real Estate Investment Trusts) (Collective
Investment Schemes) Regulations, 2013.
A REIT is a
regulated investment vehicle that enables people to collectively raise
funds for the acquisition of interests in a trust with the intention of
earning profits or income from real estate.
Thus, a
REIT may own, develop and operate income-producing real estate such as
apartments, shopping centres and offices, and subsequently distribute
the REIT income. The concept was introduced by the US Congress in 1960
but has since evolved and spread.
The REITs regulations
provide that a REIT must be structured as an unincorporated common law
trust, divided into units, and established under a trust deed. It should
have a trustee, a manager, and a promoter, all licensed by the Capital
Markets Authority (CMA).
To date, the CMA has approved and licensed various firms as REIT managers and trustees.
The
regulations further provide a REIT may be established as a development
REIT (D-REIT) or an income REIT (I-REIT). A D-REIT is aimed at
construction of real estate projects.
An issue of
D-REIT can only be made as a restricted offer to a minimum of seven
professional investors with minimum subscription or offer parcels of Sh5
million each.
On
the other hand, I-REIT is aimed at running income-generating estates.
I-REIT investors’ mainly gain from capital appreciation of the property
and from incomes in form of rents paid by occupants of their real estate
investments.
The regulations require that at least 80 per cent of the rental earnings must be distributed to unit-holders twice a year.
Notably, a D-REIT can be converted to an I-REIT. Further, either can be structured to be shariah-compliant.
REITs
in Kenya have an advantage of being exempt from taxes save for
withholding tax on interest income and dividends. There is no stamp duty
chargeable when a promoter transfers property into the REIT or when one
investor transfers the units to another investor, thus minimising
transactional and set-up cost.
REITs units can be
listed on the Nairobi Securities Exchange. This assures the unit-holders
of the highest standards of governance and transparency as listed REITs
are exposed to rigorous disclosure requirements.
Sadly,
the market uptake of REITs in Kenya has been low. Only the Stanlib
Fahari i-REIT is listed and its trading performance has not been
encouraging. An attempt by Fusion Capital to list the first D-REIT
failed due to undersubscription.
This poor market
performance can be attributed to low market knowledge and lack of
institutional support. This makes a case for heightening investor
awareness and understanding of the product and what it means to the
Kenyan economy.
There is no better time to boost the
uptake of REITs than now. If Mr Kenyatta were to endorse REITs as one of
his strategies to actualise affordable housing, it would lift the veil
of elitism and complexity that clouds the REIT framework, and
consequently unleash its potential as a tool for capital financing of
affordable housing projects.
For
REITs to succeed, they must attain a certain critical mass necessary to
create liquidity. In context of REITs focused on providing affordable
residential housing, the property market needs to be large enough. In
addition, such REITs need to deliver competitive returns to attract
institutional investors such as pension funds.
As the
REIT market is still in early stages, the government should have ‘skin
in the game’ by having a public entity set pace and issue a
government-backed REIT. Equally, there is need to incentivise the
private sector to experiment with various affordable housing-tailored
REITs, to make them attractive target and stimulate investment.
In
addition to actualising affordable housing initiative, deepening REITs
will help broaden the capital markets. REITs securities would rally
other products such as exchange-traded funds or exchange-traded
derivatives when they are introduced.
Having deep and
liquid capital markets is a plus, as it creates markets that can be
tapped to raise capital for other ‘Big Four’ projects. Lastly, REITs
will enhance stability in property markets by making mechanisms for
price discovery available. Mr Kenyatta, your endorsement is required.
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