Why East Africa’s real estate investment scheme failed to excite investors

Tuesday September 25 2018

reits

With inadequate funding for the real-estate sector, property developers are stuck with excessive debt financing, which has prompted capital markets authorities to allow developers to raise cheaper capital through the stockmarkets, instead of expensive commercial bank loans. FOTOSEARCH 

JAMES ANYANZWA
By JAMES ANYANZWA
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East African countries are struggling to attract private investors to the property market through the stock exchanges.

Exorbitant land prices and the high cost of construction materials have made it difficult for regional governments to deal with the housing problems.

Tanzania and Kenya have annual housing shortfalls in excess of two million and 200,000 units respectively, while Uganda faces a housing shortage of about 2.1 million units per year, potentially of reaching 3 million by 2030.

A 2012 Kigali housing market study projects the city to have a shortage of 352,669 units, a figure expected to hit 458,265 by 2022.

With inadequate funding for the real-estate sector, property developers are stuck with excessive debt financing, which has prompted capital markets authorities to allow developers to raise cheaper capital through the stockmarkets, instead of expensive commercial bank loans.

However, private investors are still reluctant to put money into the property market by buying shares in housing projects through Real Estate Investments Trusts (REITs).

Under the REITs model, property developers are allowed to sell units or shares in a commercial building or a set of real estate projects to investors through the money markets.

REITs are designed to help small and individual investors own a piece of the booming property market.

Competition

While policymakers are optimistic that this segment will take root, competing products offering relatively attractive returns such as listed company shares, Treasury bills and corporate bonds are impeding its growth.

“REITs have not gained the momentum we expected,” said Edward Kirathe, chairman of the REITs Association of Kenya, blaming the poor performance of the product on poor marketing and publicity.

Hosea Kili, chairman of the Association of Pension Administrators of Kenya, said REITs are a new product that is not well known, and so “There is a need for information dissemination.”

Tanzania introduced regulations for REITs (CMS Collective Investment Schemes and Real Estate Investment Investment Trust Rules) in 2011, but so far the country has registered only one REIT, with the value of the industry being estimated at $40 million.

The only REIT in Tanzania is a residential one — Watumishi Housing Company, established in 2014 and licensed by the Capital Markets and Security Authority in 2015.
Rwanda introduced Regulation No. 14 on REITs in 2013, but so far there is no registered REIT.

Uganda gazetted its Collective Investment Schemes (REITs) Regulations in 2017 and is still looking for real-estate firms to list.

South Africa introduced REITs regulation in 2013 and already it has 30 registered REITs, with the industry being valued at $16.1 billion.

REITs have been successful in the US, Japan and Canada while in the UK, where they were largely non-existent until 2007, they face stiff competition from other investor options such as bonds, which provide a return of about five to six per cent, and equity investments, which provide returns of about seven per cent.

In Uganda, analysts say there remain underlying issues with the real-estate market that, if not addressed, will hinder the successful issuance of a REIT.

Key among these is the amendment of tax laws that require rents to be paid in Ugandan shillings.

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