Workers at a construction site in Kisumu. FILE PHOTO | NMG
Summary
Kenya is seeing
significant growth in the real estate sector, driven by increased
urbanisation that has in turn driven demand for housing to surpass
supply in its three major cities, for example Mombasa, Nairobi and
Kisumu.
In response, the government has invested
heavily in infrastructure development, while taking steps to improve the
legal and regulatory framework in key sectors of the economy.
It
is against the backdrop of the enactment of the Capital Markets Real
Estate Investment Trusts (Collective Investment Schemes) regulations
2013 that the Nairobi Securities Exchange became the fourth African
bourse to launch the REITs market on October 22, 2015.
A
Real Estate Investment Trust (REIT) is a collective investment scheme
in real estate, structured as a trust where an investor owns rights or
interests in property in form of units and earns returns from income or
capital gains.
The company or trust thus pools funds from individual investors,
acquires and operates income-generating real estate, and distributes
the income derived from the properties as dividends.
In
Africa, growth of the REIT market has been limited by the absence of
enabling legislation. While there are risks associated with REITs in
Kenya, there is a high level of justification for its introduction in
the market due to the benefits associated with investing in them.
Some
of the gains are the fact that REITs facilitate: access to investment
in large scale real estate projects for individual investors,
diversification, liquidity advantage over direct investment in privately
traded underlying real estate assets, access to professionally managed
portfolios, reduced development costs for property developers, tax
advantages and limited legal liability for the shareholders of a tax
qualified REIT, and a regular income stream for the investor via
distributed dividends.
The efficiency of the stock
market also tends to give REIT investors more protection against poor
investment decisions. Additionally, REITs are known to own
multi-property portfolios with a diversified tenant pool. This means one
can invest in a diversified pool of real estate for a modest investment
amount, rather than put money in an individual specific property.
Tax
exemption status enjoyed by REITs translates into further advantages
for the investor by avoiding double taxation of earnings incurred by
corporate shareholders.
There are also risks associated
with REITs which include; need for the investor to have adequate
knowledge on both the stock market as well as property market in order
to get the most out of their investment, valuation uncertainty,
borrowing risks, economic and political environment, slow growth,
occupancy rates and rents.
Some of the steps to
mitigate the risks involved in REITs and enhance its development in
Kenya include; public education, need for the land ministry to address
challenges surrounding land ownership, cartels, issuance of title deeds,
need for property owners and developers to raise funds through the
capital markets, and the need for enabling legislation and policy
changes required to propel REIT development.
But
overall benefits listed outweigh the challenges faced. However, further
research is needed to understand other countries’ REIT structures and
regimes in order to tailor make solutions for our market.
RODGERS OBURE, CEO, Capital Land East Africa Ltd
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