There Is Need to Diversify Capital Raising Methods for Real Estate Funding – Cytonn Investments

With the various challenges facing the traditional real estate funding methods, there has been a need to diversify the capital raising methods.

This is according to analysts from Cytonn Investments who say that while Kenya’s real estate sector has been one of the fastest-growing sectors of the economy over the last 5 years, alternative methods to raise capital are needed.

Nonetheless, the sector has recently experienced a lower rate of development, with the shortage of funding in the real estate sector being a contributing factor to the slow growth.

This has given rise to innovative ways of funding real estate.

Of these new real estate funding options, structured real estate investment solutions have gained the most traction.

“Structured real estate investments are solutions that are packaged by investment professionals to enable an investor access a return, supported by the performance of real estate, in a form that meets an investor’s needs” says Cytonn Investments.

Structured products tend to have the following characteristics;

1. They involve adding layers or features to traditional real estate, through a process called “structuring”,
2. They generally deliver higher returns to the investors, in comparison to traditional investments,
3. Like real estate, they tend to provide principal protection, coupled with an above-average yield return, and,
4. They are generally traded in the private markets to qualified or sophisticated investors through alternative investment managers such as private equity managers.

While structured products are geared towards providing favorable returns to the investors, they have also proven to be quite indispensable in the real estate sector.

In the hunt for high yield, they are invested heavily in asset classes such as real estate, making them an easily accessible means of financing for real estate developers.

Another major advantage of structured funding is that it cuts out the middleman, in most cases financial institutions such as banks.

Structured products and other alternative real estate funding options have proven to be useful in funding real estate.

However, there is a heavy reliance in bank funding as opposed to funding from the capital markets, with 95 percent of business funding in Kenya being sourced from the banking industry, despite having one of the highest banking spreads globally, as compared to 40 percent in advanced markets.

Read Also: Factors Contributing to Kenya’s Drop in the Real Estate