Real Estate Investment Trusts, REITs, as an Investment Alternative

REITs are regulated investment vehicles that enable collective investment in real estate, where investors pool their funds and invest in a trust with the intention of earning profits or income from real estate.

REITs source funds to build or acquire real estate assets, which they sell or rent to generate income, which is then distributed to the shareholders at the end of a financial year. There exist three types of REITs namely;

1. Income REITs (I-REITs) – This is where investors pool to acquire long-term income-generating real estate including residential, commercial and other themes,
2. Development REITs (D-REITs) – A D-REIT is a type of REIT in which resources are pooled together for purposes of running development and construction projects, and,
3. Islamic REITs – An Islamic REIT is a unique type of REIT that invests primarily in income-producing, Shari’ah-compliant real estate.

REITs are beneficial to both developers and investors, with developers getting easier access to relatively lower cost capital, allowing them to develop institutional grade real estate.

The benefits of REITs for Investors include;

1. Portfolio Diversification – REITs, fixed income securities and equities have different long-term investment characteristics creating diversification when combined within a single portfolio,
2. Low Cost Exposure to Real Estate – REITs offer access to the property market with professional investment management at a relatively low transaction and management cost,

• Transparent Investment Vehicle – Investors are able to understand exactly what they are invested in, from the actual assets, costs and returns,

1. Accessibility – A REIT can more easily be bought or sold. Investors do not have to deal with the complexity of selling a physical property,
2. Tax Exemption – REITs in Kenya have a number of tax benefits such as corporate tax exemption and stamp duty exemption,
3. Liquidity – REITs offer a liquidity advantage over direct investment in privately traded underlying real estate assets, and,

• REITs Deliver Income & Long-term Growth – Excellent long-term performance and strong diversification attributes make REITs a natural component of a well-balanced efficiently performing portfolio,

There are a number of factors that have led to the slow development of the REIT market in Kenya.

These include; (i) inadequate investor knowledge, with most potential investors not fully understanding the REIT structure, and thus shying away from it altogether, (ii) negative investor sentiments, given the poor track record left by the existing REIT, (iii) narrow pool of trustees, given the restrictions placed by regulators, (iv) the high minimum amount investable in D-REIT schemes, which restrict majority of investors from putting in their money, (v) capping of interest rates, which affect the real estate sector performance, (vi) shallow investment-grade asset pipeline, and (vii) inconsistent income given the uncertainty associated with the real estate market.

The REIT Market in Kenya has potential for growth, but this will only be possible if a supportive framework is set up.

To revitalise the REIT market following measures can be implemented; (i) teaming up of the market players and the regulators to offer training to the investing public, (ii) broadening the pool of trustees to include corporate trustees and individuals, (iii) reducing the minimum investment to a reasonable level, (iv) development of institutional grade real estate assets that REITs can invest in, (v) continuous improvement on the regulation and government support of REITs, and (vi) collaboration of key players in the real estate and investment sectors will play a major role in harnessing broad support with regards to issuance of REITs.

It will require the collective efforts of key industry players to create a success story for REITs in Kenya with the most important being implementation of measures to increase public awareness and educate the masses on REITs as an asset class.

To read more on this, please see the full report here.