Kenya’s Capital markets Authority (CMA) is in the process of setting up a body to oversee the operations of the Real Estate Investment Trusts (REITs) as part of measures to reinvigorate investments in the real estate sector through the Nairobi Securities Exchange (NSE).
The financial markets regulator says it has made significant progress in the setting of up of the Kenya National Reit (KNR), in collaboration with the Nairobi Securities Exchange (NSE), the Association of Pension Trustees and Administrators in Kenya (Aptak) and the state-run real estate investment vehicle dubbed Sanduku.
President William Ruto is seeking to raise Ksh1 trillion ($79 billion) through private public partnership (PPP) with Ksh311 billion ($2.49 billion) coming from pension funds in five years (2022-2027), under the Sanduku imitative.
A significant amount of the funding will be channelled into the affordable housing project to buttress the Kenya Kwanza administration’s bottom-up economic model.
Since their inception in 2013 REITs continue to grapple with a combination of factors that have colluded to stifle investments in the property sector.
These include punitive taxation regime, cumbersome and multiple land laws and restrictive regulatory regime in terms of compliance costs high listing costs,
Other impediments are poor first-hand experience in REITs investments, inadequate investor sensitisation and the general state of the economy and the waning investor confidence in the stock market due to historical issues such as the collapse of chase bank and Imperial banks have made investments in REITs an arduous task
CMA introduced regulations to govern the performance of the REITs in 2013 but the investment product has only attracted one listed firm — ILAM Fahari I-REIT – and the Acorn Student Accommodation REIT that trades both as a Development REIT (D-REIT) and Income REIT (I-REIT) on the Unquoted Securities Platform (USP).
The regulator, however says the planned Kenya National REIT (KNR) will register all Reits, “and ensure the investment grade Reits are structured for immediate investor uptake,”
According to the regulator once the body is operational, “further engagements will take place to ensure there is investment appetite and support as the rollout of affordable housing units picks momentum and traction.”
CMA chief executive Wyckliffe Shamiah (right) termed the trusts a critical vehicle to “meet the growing demand for purpose-built real estate solutions including for those at the bottom of the economic pyramid.”
“Reits have been identified by the national government as a critical avenue to ramp up the rollout of affordable housing units through a public and private sector partnership,” says Shamiah.
Regionally, Uganda gazetted its Collective Investment Schemes (REITs) Regulations in 2017 and is still looking for real-estate firms to list while Rwanda introduced Regulation No. 14 on REITs in 2013, but so far there is no registered Real Estate Investment Trust.
Tanzania introduced regulations for REITs (CMS Collective Investment Schemes and Real Estate Investment Trust Rules) in 2011, but so far, the country has registered only one REIT — Watumishi Housing Company, established in 2014 and licensed by the Capital Markets and Security Authority in 2015.
Experts say efforts to finance property development through REITs are constrained by competition from capital markets products such as company shares, Treasury bills, and corporate bonds, which offer more attractive returns.
Other challenges are investors’ inexperience with Reits investment, inadequate investor sensitisation, and economic difficulties.
Mr Shamiah told The EastAfrican in an interview last year that taxation is also a significant problem associated with REITs, as income earned from these investments have are viewed as rental income or capital gains on property income.
“REITs thrive where the tax system is favourable because you are making money on real estate. Many people who are interested in the REITs have raised the issue of taxation,” he said.
However, Kenya’s revamped efforts to attract investment from private sector into the state’s affordable housing projects across the country may revive the hopes for Reits in the country.
Last year, pension funds through their umbrella lobby group, Aptak, asked President Ruto to set up a REIT and offer tax incentives as a pre-condition to unlock billions of shillings to finance his dream affordable housing projects.
“We propose that the national REIT will be the mobiliser of funds from the pensions industry as well as other subsidiary avenues like Saccos. The Reit will aggregate our resources into a vehicle that will deliver the offtake guarantee required by the supply side of the market,” Aptak resident Hosea Kili said in November last year.
The Kenyan government is targeting construction of about 250,000 affordable houses every year.
Already, a number of construction projects have been launched to this end.
Some analysts also argue that with the doubling of the capital gains tax to 10 percent last year, more investors will now favour Reits at the expense of the other capital markets products which will attract more taxes.
NSE chief executive Geoffrey Odundo had said in 2016 the use of Reits to raise finance for affordable housing projects will also “enhance liquidity and offer good returns for investors,” which might also boost their uptake in the coming years.
By Vincent Owino and James Anyanzwa