Real estate investment is an age-old lucrative investment. But how can you invest in real estate without going through the hassle of acquiring the property? Well, I am talking about investing in real estate investment trusts (REITs).
While other parts of the world started investing in REITs in the 1960s and ’70s, Kenya launched investing in REITS in the year 2013.
So what is a REIT?
A real estate investment trust (REIT) is a collection of people’s money that is used to invest in real estate property. Much like a unit trust e.g. money market fund, where people pool money to invest in financial instruments. But in this case, money is used to invest in real estate.
Types of REITS in Kenya.
There are two types of REITS that will discuss. Namely: D- REITS and I-REITS
- D-REITS. – Development REITS.
Development REITS build and sell real estate. That is develop the property and then sell the property. An example of a D-REIT in Kenya is Acorn Student Accommodation. (Acorn D-REIT)
- I- REITS – Income REITs
Income REITs acquire real estate and rent it out. Thereby earning rental income.
Examples of I-REITS in Kenya include Acorn I-REIT and ILAM FAHARI formally STANBIL FAHARI I-REIT
Now a D-REIT can become an I-REIT when it uses the developed property to earn rental income.
Structure of a REIT in Kenya.
- CMA – At the top, we have the Capital Market’s Authority. Whose work is to license, monitor, and supervise REITs in Kenya.
- Promoter – This is the individual/ company that approaches CMA for approval of setting up the REIT.
- Trustee – usually a bank that holds the real estate assets on behalf of the investors. Must be approved by the authority (CMA)
- REIT manager – Provides real estate management and fund management services for a REIT on behalf of investors. That is to set up, manage and dispose of a REIT. The REIT manager must be approved by the authority (CMA). They also charge a management fee.
- Property manager – oversees the leasing and maintenance of the property. Also charges a management fee.
- Service providers – lawyers, financial advisors, etc.
Investing in Treasury bonds in Kenya.
Benefits of investing in REITs in Kenya.
- Regular predictable passive income.
As an investor in a REIT, you get regular predictable income in form of dividends. For example, I-REITs are required to pay 80% of their annual net income to their investors. The predictable part comes in as this happens every year.
Unlike regular shares of a company where paying dividends is not a mandatory requirement.
- Liquidity
Unlike investing in traditional income where the sale of the property will take longer. The sale of shares in a REIT is quicker. That is, you can easily get your investment back by selling your shares in a REIT.
- Professional management.
As an investor in a REIT, you have no landlord responsibilities. Like buying property, financing it, managing it and taking care of the accounting. In a REIT, all of these responsibilities are taken care of by the managers.
- Low minimum investment/capital.
You can invest as low as sh.1000 in ILAM FAHARI I-REIT in Kenya.
- Exemption from double taxation.
Registered REITS are exempted from paying income tax but are required to pay withholding tax on interest earned in form of dividends.
This means that as an investor, you earn more.
How to invest in REITs in Kenya.
Method one. – via NSE
As I write this article, only one REIT is listed on the NSE.
This REIT is ILAM Fahari I-REIT.
For REITS listed on the NSE, you can invest in them as stated below.
Step 1: Open a CDS account.
Just like investing in company shares, you can invest in REITs by opening a CDS account.
This account is free to open.
Step 2: Choose a registered broker.
A broker will act as an intermediary to buy and sell the REIT shares on your behalf.
Step 3: Instruct the broker to buy the shares on your behalf.
The minimum number of units of ILAM Fahari I-REIT you can buy is 100 shares. This is just like other company shares.
Method 2
Invest via the unquoted securities platform.
For example, the Vuka platform which hosts the Acorn D-REIT and the Acorn I-REIT.
The Acorn D-REIT is available to institutional investors. The minimum investment is sh.5 million.
For Acorn I-REIT, you can invest by either getting invited by an investment club member or calling 0800730333.
Risks in investing in REITs in Kenya.
- REITs are affected by market conditions. These include interest rates and inflation.
- They are exposed to capital loss. That is the share price fluctuates. For example, ILAM Fahari I-REIT was first trading at sh.20 in 2015 but this price is currently around sh.6.20.
- The assumption is that there will always be tenants.
The risk is that the demographics of people change with time. People move out of areas.
- Risk of mismanagement.
As an investor in a REIT, you are trusting other people with your money. These managers might choose to serve their interests instead of the investors’ interest.
- High professional fees.
REIT managers charge high management fees. These fees are part of the REIT’s biggest expense. Which eats into the investors’ earnings.
- Lack of diversification.
REITs are required to invest 75% of the capital in real estate. This leaves only 25% on making other investments. That means that when the real estate sector is not performing, REITS go down as well.
- Slow growth.
I-REITs are required to pay investors 80% of the earnings. That leaves only 20% for expansion.
As I pen off, I’d like to leave you with a reminder. Do your due diligence first before making an investment. We might share these lucrative investments with you but the question is, is this type of investment in line with your financial goals? If yes, then what are you waiting for? If not check out other investment opportunities until you find the best fit.
