Real Estate Investment Trusts, commonly referred to as REITs, is the new investment frontier for the real estate market in Kenya.
What is a REIT?
A REIT is a regulated investment vehicle which operates and finances income-producing real estate. REITs are traded on the NSE like any other company share, offering investors a liquid stake in real estate.
How REITs Work?
Essentially, REITs operate in a similar manner to mutual funds whereby, they allow individual investors to acquire ownership in real estate portfolios. This real estate portfolio receives income from properties it owns such as apartments, shopping malls, hospitals, office buildings, hotels and many more. REITs are designed and purposed for the real estate sector. Thus, they specialize in managing leased space or offering commercial real estate loans and passing on collected rent/interest payments to their investors in the form of dividends.
The diagram below illustrates how this is achieved:
Types of REITs
There are three types of REITs in Kenya, namely: the Income REIT, the Development REIT and the Islamic REIT. Each one of these REITs is structured differently but generally operates as any other REIT.
#1: Income REITs (commonly known as I-REITs)
In I-REITs, investors pool their resources into a trust with the aim of investing in income-generating real estate such as residential, commercial or any other profitable real estate segment. Investors seeking to gain through rental income and capital appreciation. These gains are then later distributed to unitholders after an agreed-upon duration. I-REITs in Kenya include Stanlib Fahari I-REIT – which currently trades on the NSE.
#2: Development REITs (commonly known as D-REITs)
Development REITs or D-REITs are assets which are pooled together for reasons for procuring qualified land for improvement and development ventures. The ventures may incorporate among others, residential and commercial projects.
#3: Islamic REITs
Islamic REIT is a unique Shari’ah-compliant type of REIT. Its primary objective is to invest income-generating real estate segments.
REITs Structure
REITs are structured as open-ended or close-ended. A close-ended fund can be converted to an open-ended fund and vice-versa depending on the circumstances.
Open-Ended REITs
In an open-ended REIT, shares can be issued or redeemed at any time. The value of the investment and redemption price per unit is essentially determined by the net assets per unit. The net asset value (NAV) is determined by the total current market value of all the assets held by the REIT, minus any liabilities and then divided by the number of shares outstanding. The net asset value is recalculated once a day after the market closes. Hence the size of the fund may actually increase or decrease as investors acquire or dispose of, of their securities.
Closed-Ended REITs
While in a closed-ended REIT, the number of shares outstanding is fixed. Therefore, closed-ended REITs raise money by selling shares through a public offering much like corporations. The price is determined by what investors are willing to pay for them at any given time just like shares. As such, the price fluctuates through a day of trading as the price is determined by market forces of demand and supply.
Benefits of Investing in REITs
Real estate has always been an attractive investment option in Kenya. It offers real capital appreciation and a low risk of capital loss. With the introduction of REITs in Kenya, various benefits are now apparent to investors, making REITs an attractive alternative.
Some of the main benefits experienced are:
I. Total return. REITs provide stable dividend yields, plus potential long-term capital appreciation. Additionally, REITs tend to perform similar to value stocks and provide better returns than lower-risk bonds.
II. Accessibility. REITs offer easier access and ownership of real estate.
III. Steady dividend-based Income. Long-term lease agreements with tenants offer a steady income stream which increases and grows on an annual basis. REITs in Kenya, are required to distribute at least 80% of their earnings to investors.
IV. Liquidity. With direct real estate investing being so illiquid, REITs offer investors greater liquidity. Investors can easily convert units into cash or redemption in the case of an open-ended fund.
V. Diversity. REITs offer investors exposure to a myriad of professionally managed real estate opportunities. Investors have access to shopping malls, office buildings, industrial projects etc.
VI. Professional Management. They offer investors an opportunity to have professional property managers and fund managers. These professionals will easily put their money to good use by taking advantage of various market opportunities that would otherwise not have been accessible or noticeable.
VII. Tax Efficiency. REITs are tax efficient as investors are exempt from a number of taxes i.e. income tax, capital gains upon sale and more.
NSE Listed REITs in Kenya
There are about five REITs in Kenya but only one is listed on the NSE. The Stanlib Fahari I-Reit was listed in 2015.
Performance of REITs in Kenya
The real estate sector is known to lack transparency. Real estate deals are opaque and greater transparency has been demanded by investors. Additionally, regulations and laws to govern capital raising for real estate projects were lacking. Therefore, REITs were introduced in Kenya to address this specific issue as they are well-structured and regulated investment vehicles in which third-party financing can be made available for the real estate sector.
With the only REIT floating on the NSE, information on it is available on Stanlib’s Webpage. The Stanlib Fahari I-REIT recorded a net profit of 106M KES for the year 2016. According to management, I-REIT management attributed this result to efficient management. The performance of the REIT has been greatly affected by the difficult working environment coupled the low levels of awareness.
How to Invest in REITs in Kenya
You can buy REITs either by purchasing shares through a broker or directly on the NSE. You can also purchase them on any other major exchange if you are looking internationally. REITs can also be purchased through a mutual fund or exchange-traded fund. The Stanlib Fahari I-REIT is available for purchase to the general public, while the development REITs are restricted to professionals only.
Buying REITs directly on the NSE can be done in the same way you can buy shares. Visit your local broker and request to purchase shares of the Stanblib Fahari I-REIT. Buying REITs through a Mutual Fund can be done by investing in a fund that specialized in real estate or has REITs within its portfolio composition.
How to Determine the Value of REIT Shares
Since REIT prices are determined by market forces throughout a trading day just like shares, you will need to access if it is a worthwhile investment like analysts typically do.
Here are some of the things you’ll need to look out for:
A. Growth. Is there anticipation for the growth of earnings per share?
B. Total Return. Is there anticipation for a greater total return on the share? That is a higher expected price change and higher prevailing dividend yield.
C. Dividend Yield. Is the current dividend yield relative to other yield-oriented investments better? That is shares, bonds and other high-income investments.
D. Payout Ratio. Is the current dividend payout ratio as a percentage of the REIT FFO (funds from operations) reasonable?
E. Valuation. Are the underlying assets of real estate/mortgage/ and other assets properly valued? Compare to the market to arrive at an overvaluation or undervaluation decision. Invest, if undervalued.
Drawbacks of REITs in Kenya
There are various drawbacks to investing in REITs in Kenya. However, the major drawbacks to investing in REITs in general are:
I. Economic Instability. Just like any other investment, REITs are also affected by the economy and political environment. In most cases, a depressed economy and unstable political environment tend to lead to the depreciation of property value.
II. Inconsistency. Rental income may not be consistent due to termination of lease agreements, failure to renew lease agreements and failure to secure tenants in good time to ensure continuity of income. That is why the success of any REIT depends on the effectiveness and efficiency of management in managing the properties.
III. Over-Concentration. Lack of diversification within a REIT. Most REITs only focus on investing in a single property type. Therefore, the weakness in that one property segment is then transferred to your portfolio. For instance, a REIT that focuses on commercial rentals has the potential to be seriously affected by economic downturns, such as that seen in 2017 and 2020.
IV. Boring. REITs are considered extremely boring by most investors as they are consistent in dividend returns year-on-year. This makes REITs sensitive to demand when other higher-yielding assets take funds away from REITs thereby lowering the share price.
Taxation of REITs in Kenya
REITs are income tax-exempt if they comply with the REIT regulations. They also must remain registered with the Capital Markets Authority and the Commissioner of Taxes. This means that when a REIT distributes income, sells units on behalf of holders or pays redemption, the income is considered already taxed. Therefore, investors are not required to include REITs in their tax investment accounts.
However, the following are the instances that REIT holders must account for tax:
A. REIT holders must account for withholding tax on interest income and dividends. Thus upon distribution of profits, investors are subject to tax at the rate of 5% (10% non-resident) of dividends and 15% (15% non-resident) for interest.
B. Capital gains tax must be accounted for in the event of gains from transfers or redemption of units from a REIT
Bottom Line
REITs offer investors greater diversification of their investment portfolio. They are also a great option for those seeking to invest in real estate yet maintain high liquidity. REITs are here to stay. The market will continue to develop and increase its offerings in the REITs as Kenya continues to develop economically.
Meanwhile, You can click on the following links to read more about real estate investing:
- Top 5 Ways To Begin Investing In Real Estate
- Should You Invest in a Property with a Friend?
- Ways to Turn Single-Family Homes Into a Cash Cow
- 7 Common Mistakes to Real Estate Investing to Avoid
- How to Buy Stocks Online on the Nairobi Stock Exchange
Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.
