Investing in REITs – The Options, and How the Kenyan Market Works

Since the introduction of Real Estate Investment Trusts (REITs, in Kenya in 2013, they have picked traction and opened a new investment asset class accessible to both local and foreign investors.

REITs are a regulated investment vehicle which operates and finances income-producing real estate. Like any company share, they are traded on the NSE, and they offer investors a liquid stake in real estate.

How Do REITs Work?

In a nutshell, REITs have the same operating principle as mutual funds. They allow individual investors to acquire ownership in a real estate portfolio.

REITs promoters source funds to build or acquire real estate assets, which they sell or rent to generate income. The income generated is then distributed to the investors as returns/dividends in investing in real estate trusts.

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The property is held by a trustee on behalf of unitholders and professionally managed by a REIT manager.

Types of REITs

In Kenya, there are three main types of REITs. They include:

• Income Real Estate Investment Trusts (I-REITs): These are real estate trusts that largely derive their revenue from rental properties. The dividends and returns are gained through rental income and capital appreciation from the investments undertaken.
• Development Real Estate Investment Trust (D-REITs): Resources in this type of real estate trust are pooled together for purposes of developing real estate projects. Once a development has been completed, a D-REIT may be converted to an I-REIT and here the investors may choose to either re-invest their funds, sell, lease their shares or they can choose to sell the developments that have been undertaken.
• Islamic Real Estate Investment Trusts: This is a unique type of REIT that only undertakes Shari’ah-compliant activities. A fund manager is required to do a compliance test before investing in this type of REIT to ensure it is Shari’ah compliant.

Why Invest in REITs?

REITs have myriads of benefits for investors. For one, it has competitive long-term results since its performance is derived from real estate investments. And we all know that over time, real estate can outperform other asset classes.

REITs, like fixed income securities, and equities have different long-term investment characteristics creating diversification when combined within a single portfolio.

Investing in real estate trusts allows investors to customize their portfolios depending on the fund characteristics, the various real estate sectors, and geographic exposures.

Better yet, REITs listed on securities exchange provide offer liquidity advantages for investors over direct investments in real estate assets. This extends to real estate developers as well since they may not need to completely sell their entire assets if they are seeking some little liquidity.

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With constant returns, REITs are a good source of stable and consistent returns. That is not to mention the taxation benefits such as income tax exemption and stamp duty exemption.

Finally, REITs provide operating transparency mainly because of how they are structured and operated. And because they are regulated by the Capital Markets Authority (CMA), they adhere to high standards of corporate governance, financial reporting, and information disclosure.

Challenges of Investing in REITs in Kenya

Despite these upsides, REITs have their fair share of challenges as well. Trustees, the ones holding the real estate assets on behalf of investors, are mainly limited to banks owing to the minimum capital requirements of 100 million shillings.

The approval process can take time particularly to get the necessary documentation and meet all the required regulatory requirements.

Consequently, there is inadequate investor knowledge since these trusts have only been in the Kenyan market for only 8 years. Its popularity has remained low mainly due to inadequate investor awareness or education of real estate trusts hence low investment in the market.

REITs also require a high minimum investment amounts capped at 5 million shillings as per the current regulations. That is 100 times the minimum income of a middle-class person. Investors looking to invest in REITs, therefore, are discouraged from considering it a