Advantages & Disadvantages Of Investing In Real Estate Investment Trust Schemes (REITs) in Kenya

reits in Kenya

Written by Agatha

January 4, 2022

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REITs (Real Estate Investment Trusts) are regulated investment vehicles where investors like you and I pool their funds (just like we do while investing in Money Market Funds) to invest in real estate assets. In exchange for the money you invest, you are allocated units from which you earn dividends and capital gains. It is that simple!

Yes, you can invest in real estate without having to directly buy a house, plot, or put up rentals.

Here’s the typical structure of REITs:

reits in Kenya

Credit: Traded Estate

For a total beginner’s guide on investing in REITs in Kenya that covers:

  • What REITs are
  • The different types of REITs in Kenya
  • A run-through of  the structure of the REITs currently registered in Kenya
  • How you can invest in REITs in Kenya
  • FAQs about REITs in Kenya

Click here.

What are the advantages of investing in REITs in Kenya?

The real estate sector is one where most Kenyans are conversant. It’s an attractive sector as it offers a low risk of capital loss and capital appreciation. 

1. Tax exemption

There are only two ways to make a guaranteed financial return:

Investing in REITs in Kenya gives you an opportunity to save on taxes.

REITs are exempt from both corporate and income tax. The corporate tax is a heavy expense to most businesses in Kenya which makes it difficult for these companies to be profitable. 

The profits available for distribution to the shareholders are much more because of this exemption.

If the REIT is listed on the stock exchange, a With Holding Tax of 5% to residents and 10% to non-resident shareholders is charged on the dividends.

 

2. Access to investing in the real estate sector for low-income earners

REITs give investors from both low and middle-income classes access and ownership in the growing real estate sector in Kenya because it’s not as capital intensive as a direct purchase of a property. This is made possible by the fact that several investors (both individuals and organizations) pool their funds together and invest as a group.     

3. High yields and long-term returns

CMA requires REITs in Kenya to distribute at least 80% of their earnings to investors.

The real estate market is lucrative, usually has an annual return of between 8 to 10% and which enables REITs to offer stable dividend yields and potential long-term capital appreciation.

REITs also offer passive income to the investor through long-term lease agreements with tenants. Here is a snapshot of ILAM FAHARI I-REIT-returns from inception to date:

reits in Kenya

4. Liquidity

This is the most attractive aspect of REITs for me. You can get in and out of the market whenever you wish.

I have often interacted with investors, both young and old who are asset rich (they own several plots of land) but are cash poor (their pieces of land do not generate any income for their daily use). You will often find such individuals, especially retirees, borrowing money for their daily use and often falling into debt

Being asset-rich and cash-poor is in itself, an investment mistake. You should structure your investments in a way that you have access to cash (liquidity) for your day-to-day sustenance.

Consider having REITs as part of your investment portfolio as you can easily convert your investment into cash by selling your units in the secondary market.

5. Portfolio diversification

A lot of us think that the only way to invest in real estate is through land and rental units. If we’re being honest, most of us will never be wealthy enough in this lifetime to individually own a real estate property such as a mall.  

REITs will give you an opportunity to invest in a variety of other real estate developments such as shopping malls, Student accommodation facilities, warehouses, office blocks, etc

6. Professional management 

Most of us don’t have the skills to manage our real estate investments. Instead of only accumulating plots of land which you might not have an idea how to develop, investing in REITs will give you access to professional property & fund managers who understand the real estate industry and business. 

REITs are also a great way for Kenyans in the diaspora to invest in real estate as they often complain of not having reliable and trustworthy individuals to manage their investments at home.

7. Transparency

The REIT’s structure provides an operating efficiency because they adhere to high standards of corporate governance, financial reporting, and information disclosure. 

REITs managers are required to disclose financial information to investors. They’re also required to disclose risks they’re likely to encounter as they invest your funds and inform you when they make new business developments in a timely manner.

 

Risks, challenges, & disadvantages of investing in REITs in Kenya

REITs managers are required by CMA to report on identified risks that are likely to impact the future performance of a REIT and its capacity to fulfill its objectives.

1. Industry-specific risks

The real estate sector in Kenya goes through different performance cycles and trends affected by several factors including socio-economic and regulatory changes. Any changes in property industry dynamics may impact growth trends. 

2. Regulatory compliance

We all remember the drama in 2018 when there were demolitions of property built on riparian land and road reserves. 

The demolitions caused massive financial losses to property owners. 

The REIT manager should perform extensive due diligence prior to any property acquisition to ensure none of their properties is built on riparian land.

3. Land titles

Every day, we hear stories of people who paid for land years ago but are yet to be issued with title deeds. This is caused by the weaknesses in the land title and rental lease registration processes which impacts the operation of REIT schemes.

Uncertainty in the process and swiftness of acquiring titles present 2 risks to REIT schemes:

  • Delays in completion of the purchase of properties until titles and leases are regularized.
  • Delays in the enforcement of lease contractual arrangements both of which could have adverse impacts on the business, financial condition, and results of operations of I-REITs. 

The REIT manager should conduct due diligence to ensure that all property in their portfolio is rightfully owned by the scheme.

4. Terrorism 

Physical property is vulnerable to destruction which could lead to the complete loss of the asset or business disruption. 

For example, the terrorist attack on the Dusit D2 Hotel in Riverside caused financial losses to the property and businesses owners.

REIT Schemes managers should ensure that they have adequate insurance cover to safeguard against such losses. They should also have security procedures to minimize this risk.

5. Risks common to traded REIT securities

REITs traded on the Nairobi Securities Exchange are subject to securities market volatility, reflecting demand and supply conditions, just like other listed securities. 

The price of the REIT Scheme units will generally reflect prospective investors’ confidence in Kenya’s economy, the property market and its returns, the REIT Scheme management, and interest rates.

This is a reminder that you can lose a significant amount or all of your money invested in a REIT scheme. You can manage this risk by learning how to professionally manage your portfolio

6. Market risk

The underlying asset value of a REIT’s properties may be impacted by fluctuations in supply and demand for the type of rental properties that the REIT has invested in.

The REIT Manager mitigates the impact of these risks by applying a careful investment evaluation process to help ensure that properties selected and new assets that the REIT may invest in the future are in line with the REIT’s stated investment philosophy and objectives and meet the minimum investment return criteria.

7. Income risk

The tenancy agreements of the underlying properties may be renewed at a lower rental rate than the previous agreement or if the occupancy rate falls therefore posing a future income risk to the investors.

This risk can also come about if there are changes in the REIT’s ability to collect rent from tenants on a timely basis or at all.

Inconsistency in rental income due to termination of lease agreements also poses an income risk to investors.

Changes in laws and governmental regulations in relation to real estate, including those governing usage, zoning, taxes, and government charges also pose a huge income risk to REIT investors in Kenya.

Such legal revisions may lead to an increase in the management expenses or unforeseen capital expenditure to ensure compliance.

The REIT manager mitigates these risks by efficiently managing the assets. 

8. Securities liquidity risk

As with other listed securities listing and quotation does not guarantee that a highly-liquid trading market for the units will remain strong.

9. Regulatory risks

All REIT schemes are subject to the REITs Regulations. 

Changes to the regulatory framework applicable to a REIT could impact the REIT’s financial performance and after-tax returns to unit holders, especially considering that the regime governing REITs in Kenya is relatively new.

The REIT Manager should mitigate this regulatory risk by participating actively in industry forums to discuss and debate potential regulatory changes and their potential impact.

10. Tax risks

Changes to the regulatory tax framework applicable to a REIT could impact the REIT’s financial performance and after-tax returns to unit holders, especially considering that the regime governing REITs in Kenya is relatively new.

The primary objective of the REIT Scheme is to provide unit holders with stable annual cash distributions from investment in a diversified portfolio of income-generating real estate assets.

11. Economic instability

REITs are affected by the economic and political environment of a country. An unstable political environment leads to the depreciation of the value of the property.

12. Lack of diversification with a REIT

Some REITs may concentrate their portfolio on a single type of property. All the weaknesses and risks involved in such a property will be reflected in your portfolio as an investor.

You can mitigate these by diversifying your investment portfolio

13. Inability to access your money (this isn’t applicable to Kenya at the moment)

This applies to close-ended REITs. The investor is unable to access their money until the end of the investment period unless they come to an agreement with The Trustee that allows them to offload the units.

reits in Kenya

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