Regulatory Response to Real Estate Funds In Kenya During COVID-19

The Coronavirus pandemic (COVID-19), which began as a health crisis, morphed into a global economic crisis as a result of containment measures put in place worldwide to curb the spread of the virus, which brought the global economy to a standstill.

The real estate sector was adversely affected as evidenced by the poor performance of Fahari-I-REIT, the only listed REIT in Kenya, which closed the year at Kshs 5.6, 71.8% lower than its initial listing price of Kshs 20.0.

The poor performance was attributable to a decline in revenue due to COVID-19’s impact on the commercial office and retail sectors, which is expected to continue suppressing rental income growth.

The Kenyan government, the Central Bank of Kenya (CBK), and the Capital Markets Authority (CMA) took various measures to mitigate the negative effects of the pandemic on the economy and also to support financial markets.

Investing in the real estate sector can either be done directly through the traditional method where an investor buys land or property, develops, then sells or rents out, or indirectly through real estate funds.

Investing in real estate funds has various benefits such as diversification, hedging against inflation, reduced volatility, enhanced returns, professional management, and no landlord duties for the investor among others.

However, just like any other form of investment, real estate securities carry with them certain risks which include participation risk, illiquidity risk, and market risk.

Some of the negative effects of COVID-19 on the real estate sector include: (i) An increase in rent defaults, (ii) Low occupancy rates which negatively affected revenue, (iii) Dipping property prices which severely affected revenue and profitability, (iv) Huge investor withdrawals from funds as investors reassessed their investments due to the uncertain economic outlook, (v) Disruption of supply chain networks which resulted in a slowdown of construction activities hence reducing revenues, and, (vi) Illiquidity of funds which were attributable to substantial valuation losses, net investor outflows and low cash holdings as the funds invest in illiquid assets.

The government of Kenya stepped in to support households and firms by reducing the corporation tax to 25.0% from 30.0%, in addition to reducing the VAT rate to 14.0% from 16.0%.

The Central Bank adopted an accommodative stance to support the economy, lowering the Cash Reserve Ratio (CRR) to 4.25% in March 2020 from 5.25% in January 2020 which served to increase liquidity in the economy, in addition to lowering the Central Bank Rate (CBR) with the aim of ensuring affordable credit to customers.

The CBK also provided guidelines to banks for loan restructuring arrangements for their customers’ loans based on their respective circumstances arising from the pandemic.

The CMA, in their capacity as the primary regulator of real estate funds, took measures such as allowing the progression of some of the activities that are usually sanctioned during Annual General Meetings (AGMs) for listed companies such as remuneration and dividend policy deliberations, relaxed disclosure obligations in relation to the publication of financial statements in two newspapers of national circulation, and, allowed companies to hold virtual AGMs in light of the movement and convening restrictions imposed to curb the spread of COVID-19.

In our view, the regulator should have done more to cushion real estate funds against the adverse effects of the pandemic.

Real estate funds require regulatory support in order to inspire investor confidence and stimulate growth. The real estate sector and real estate funds also go a long way to promoting economic growth and development through the development of infrastructure and promotion of the Housing agenda, in addition to creating employment.

With Kenya facing a housing shortage of 2 million units, 250,000 units need to be built annually, and the best way to provide funds to plug the deficit is through capital markets and real estate funds.

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