In Kenya, Real Estate Investment Trusts (REITs) have not made a substantial contribution to the country’s affordable housing initiative, despite their potential. Designed to provide investors with a means to invest in diversified, large-scale real estate assets, REITs are often praised for their potential to democratize real estate investment. Nevertheless, in Kenya, these financial instruments have yet to promote the development of the nation’s affordable housing program.
In 2017, the Kenyan Government initiated the Affordable Housing Program to address the housing supply and demand gap in the country. The combination of urban migration and a growing population has put significant strain on limited resources. By 2050, it is projected that half of Kenya’s population will reside in urban areas. With an annual demand for 250,000 homes, only 50,000 new homes are constructed each year, resulting in an annual housing deficit of 80.0%.
A REIT is a regulated investment vehicle that operates or finances income-generating real estate. Investors pool their funds with the expectation of desirable returns. This investment vehicle was introduced in Kenya in 2013, but it has not yet contributed to the Affordable Housing Program, with no houses under the AHP being developed using REIT financing.
Currently, there are only four active REITs in the Kenyan market, including Fahari I-Reit, Laptrust Imara I-Reit, Acorn I-Reit, and Acorn D-Reit. Of these, only one is trading on the main investment market of the Nairobi Securities Exchange. Kenya’s performance in this regard falls short compared to countries like South Africa, which implemented REIT regulations in 2013, similar to Kenya.
One reason for this lack of contribution is the limited information available to investors about REITs and their capabilities. Investors often prefer investments they can easily understand and consider feasible, which can make investing in REITs appear too risky due to information asymmetry.
Another factor is the uncertainty of Kenya’s tax regime, where tax laws change annually during the budget-making process. While REITs enjoy tax benefits such as exemptions from income tax, value-added tax, and stamp duty, these benefits are often at risk due to the fluctuating tax statutes, discouraging investment.
Lastly, the stringent regulations established by the Capital Markets Authority for new entrants into this asset class create significant barriers for investors. These regulations hinder investment in REITs, which have the potential to bolster the affordable housing program by bridging the financing gap and alleviating funding constraints. To register as an income REIT (I-REIT), a minimum net asset value of KES 300 million is required, while a development REIT (D-REIT) must have a net asset value of KES 100.0 million. REIT trustees must maintain a minimum paid-up capital and reserves of KES 100.0 million.
In conclusion, while REITs hold the potential to enhance the real estate sector in Kenya, their contribution to affordable housing has been limited due to the high barriers to entry. As the Kenyan Government seeks to realize the affordable housing program, initiatives promoting investment in REITs should also be encouraged. Addressing this issue will require a multifaceted approach to shift investors’ perspectives on REITs and the broader Kenyan real estate landscape.
