Workers at a construction site in Kisumu. FILE PHOTO | NMG
The Real Estate Investment Trust (Reits) Regulations were passed
by the Capital Markets Authority sometime in 2013 allowing investors to
invest in real estate.
The major attraction of a REIT
is that it would allow otherwise smaller investors access to large
scale properties as the investment operates in a pooled manner.
Though
the uptake of Reits has been a bit low in the market, the first Kenyan
issue earned a net profit of Sh108 million indicating that Reits are
indeed a promising tool for real estate investment.
The
current government has its Big 4 agenda where one of the pillars is to
provide accessible housing and create about 500,000 new home owners. The
Constitution and the land policy has provisions on equitable allocation
of land resources.
A Reit is one of the tools that can be considered in actualising
this goal. A Reitwould enable small investors’ access opportunities in
real estate investment.
Reits are also beneficial to
developers as it enables them access larger pools of funds that would
have otherwise been inaccessible.
Construction finance
has been a long-term challenge for many would-be developers. Infact
large construction projects are only undertaken by developers with
financial muscle. An average construction project runs into the hundreds
of millions of shillings, figures out of reach for many.
The
options for construction finance are limited. Traditionally the most
common form of finance has been debt from financial institutions.
The
developer may take out a loan and issue alternative security or in most
cases, secure the land on which the development is undertaken. The
income from the development is then used to service the loan. Repayment
of the loan is pegged on the sales.
The risk from debt financing is very high due to the fact that the income may be uncertain.
Equity
finance has also been used though most landowners are sceptical of this
option due to the fact that there is an element of dilution of
ownership.
Real estate developers have been presented with a new alternative to construction finance through the Reits.
Once
all the regulatory approvals are passed, then the Reit can access funds
from the public. The schemes may be listed whereby the public is
invited to invest in them.
The infamous land buying
companies of the 1990s were a loose form of Reits in that investment
into real estate was done through a pooled fund.
The
promoters would form a land buying company and invite persons to
subscribe in its shares with the promise that the company would acquire a
large tract of land and thereafter subdivide portions for the benefit
of the shareholders.
More often than not the
subscribers ended up losing their money to the promoters. However, the
Reits are heavily regulated by the Capital Markets Authority (CMA) and
it is difficult for an investor to lose his investment due to fraud or
such other misrepresentations.
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