Why Kenya’s REITs market is off to sluggish start
Owning a piece of real estate at the stock market is uncommon in many markets in Africa although there have been some early success stories.
Real estate investment trusts (REITs) invest in most property types including apartment buildings, cell towers, data centres, hotels, medical facilities, offices, retail centres, and warehouses.
The Johannesburg Stock Exchange market, the largest in Africa and 17th globally, has 33 listed REITs, indicating a more developed market than Kenya, which only has two REITs listed on the Nairobi Securities Exchange (NSE) — the ILAM Fahari I-REIT and Laptrust Imara.
The Acorn Student Accommodation I-REIT (ASA I-REIT) and Acorn Student Accommodation Development Real Estate Investment Trust (Acorn D-REIT) are traded via an over-the-counter (OTC) platform. But just how do the REITs work and why is there still very little interest?
How REITs work
A REIT is a vehicle that allows investors to acquire rights or interests in a trust that is divided into units to earn profits or income from real estate as beneficiaries of the trust.
The workings of a REIT are like any other listed company. Investors can buy and sell them like stocks. The REIT leases space and collects rents on the properties, then distributes that income as dividends to shareholders.
Types of REITs
Development Real Estate Investment Trusts (D-REITs): Investors pool their capital for acquiring real estate to undertake development and construction projects and associated activities such as the Acorn D-REIT.
Income Real Estate Investment Trusts (I-REITs): Here investors pool their capital for long-term income-generating real estate including housing, commercial and other real estate, for example, Laptrust Imara I-Reit.
Islamic Real Estate Investment Trusts (Musharakah): This type only undertakes Shariah-compliant activities. A fund manager is required to do a compliance test before investing in this type of REIT to ensure it is Shariah-compliant. None is listed in Kenya.
How to trade in REITS
This is done by buying shares through a broker. The minimum number of units/shares you can buy from is typically 100.
You can also buy shares of a non-traded REIT through a broker or financial advisor who participates in the non-traded REIT offering.
Why are there so few Reits listed in Kenya?
According to the Reits Association of Kenya chairman Ken Masika, this is because of high launch costs, lengthy registration process and limited market awareness.
“The cost of initiating a REIT can be significant, encompassing legal, administrative, and marketing expenses. These high upfront costs can discourage potential entrants from launching new REITs,” he says.
“The registration process for establishing a REIT can be time-consuming. Regulatory approvals, compliance checks, and legal formalities contribute to delays in launching REITs, which can be discouraging for market participants.”
Mr Masika also notes that many investors, developers, and property owners lack a proper understanding of REITs.
The lack of awareness and education about how REITs function and their potential benefits can hinder their growth and acceptance in the market.
Merits and demerits
Listed REITs enjoy highly favourable tax benefits in the form of exemptions such as the value-added tax and stamp duty.
They also have higher returns, steady but not guaranteed income, are regulated, have a diversified portfolio and tax-free returns.
The Income Tax Act provides that REITs and REIT investee companies, upon registration with the taxman, are exempted from the 30 percent income tax rate.
However, the gain accrued by an investor on the transfer of property into the REIT is subject to capital gains tax (CGT) at the newly adjusted rate of 15 percent from the initial rate of five percent.
On the other hand, the transfer of property from life insurance companies into the REIT is exempt from CGT. Additionally, the distribution of income (dividends) to unitholders of the REIT is exempt from tax.
What is the future of the REITs market in Kenya?
Property developers project a positive outlook for REITs in Kenya.
“The REITs market has been experiencing remarkable growth in recent years, characterised by a notable success rate with the establishment of three active REITs.
This trend not only reflects the increasing investor interest but also points toward the potential that lies ahead,” says Mr Masika.
“The Kenyan real estate market has not been an institutionalised market compared to South Africa, real estate is just seen as a property and not a financial investment,” said Mivida Homes CEO Samuel Kariuki.
What to expect in the Reits market, any new listings?
Notably, in March 2023, a significant development occurred in the pension sector with the launch of the LAPTRUST IMARA I-REIT.
“We have several companies in the pipeline who are actively engaging with RAK, on the best way to enter the REIT market. We should see the participants/listings in the market more than double within the next 12 months,” said Mr Masika. BY BUSINESS DAILY
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