A man who is used to building huts can never build a kingdom. A kingdom is about collective minds and goals. REITs (Real Estate Investment Trusts) have changed the global perceptive of ownerships, from one man owns it all to collective ownership especially in terms mitigating risks.
REITs are regulated special investment funds with a sole purpose pool funds to invest in real estate with the goal of generating incomes and profits. REITs source funds from investors who then sell their portfolio to the public in order to generate income, as well as, rent or lease in order generate monthly/annual income. The incomes generated are distributed to the shareholders proportionally at the end of a financial year. In Kenya the Capital Markets Authority (CMA) is the regulatory body of the REITs through the Capital Markets (Real Estate Investment Trusts) (Collective Investment Schemes) Regulations, 2013; the Capital Markets (Corporate Governance) (Market Intermediaries) Regulations, 2011; and any other applicable Regulations.
There are 3 types of REITs; Income REITs (I-REITs), Development REITs (D-REITs) and Islamic REITs. I-REITs are an income generating REIT, through capital appreciation (upward revaluations of property resulting in a gain) and rental incomewhereas D-REITs are mainly meant for acquiring and construction of development properties. After the developments the D-REITs are converted to an I-REIT subject to the holder’s approval. On the other hand, Islamic REITs are REITs that invest in Shari’ah compliant real estate. A research by Cytonn assets managers limited on 25th August, 2024 analyzeded the major REITs in Kenya which are, ILAM Fahari I-REIT, LapTrust Imara I-REIT and Acorn I-REIT and D-REIT. There’s been steep growth in the REITs sector in terms of both activities and value mainly attributed to the growth in Real Estate sector which is the main variable in the growing GDP. The growth rate has been just over 5% year on year from 2023.
Factors that have greatly slowed down the investments in REITs are; High minimum capital requirements of Kshs 100.0 mn for REIT trustees compared to Kshs 10.0 mn for pension funds Trustees, essentially limiting the licensed REIT Trustee to banks only. Second, the rigidity of choice between either D-REIT or and I-REIT forces managers to form two REITs, rather than having one Hybrid REIT that can allocate between development and income earning properties. Third, limiting the type of legal entity that can form a REIT to only a trust company, as opposed to allowing other entities such as partnerships, and companies. In addition to systematic changes such as inflation, raising the cost of construction materials despite the Kenyan economy being greatly undersupplied in the housing sector, slow approval and ever-changing construction policies from the counties and the national government and unattainable capital requirements for most of the companies in Kenya.
REITs are turning out to be a great investment vehicle especially in Kenya, for the risk averse investors who want to diversify their portfolio. First, REITs have simplified tax treatment with exemptions from corporate tax and income tax. CMA regulations instills confidence in REITs thus making it easy to attract investors. Nevertheless, REITs promise a high return with an average yield of 9% to 12%.
All this shows that the future of real estate investing is in the REITs.
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