An Income Real Estate Investment Trusts (I-REIT) is a form of collective investment that is allowing Kenyans to invest in real estate without having to build or directly buy a property. I-REITs in Kenya are regulated by the Capital Markets Authority and use the concept of collective investing.
According to the NSE, A REIT is a regulated collective investment vehicle that enables persons to contribute money’s worth as consideration for the acquisition of rights or interests in a trust that is divided into units with the intention of earning profits or income from real estate as beneficiaries of the trust.
There are three main types of REITs and they include:
Development Real Estate Investment Trusts (D-REITs):
A D-REIT is a type of REIT in which investors pool their capital together for purposes of acquiring real estate with a view to undertaking development and construction projects and associated activities.
Income Real Estate Investment Trust (I-REITs):
An I-REIT is a type of REIT in which the investors pool their capital for purposes of acquiring long term income generating real estate including housing, commercial and other real estate.
Islamic Real Estate Investment Trusts:
This is a unique type of REITs which only undertakes Shari’ah compliant activities. A fund manager is required to do a compliance test before making an investment in this type of REIT to ensure it is Shari’ah compliant.
𝐇𝐨𝐰 𝐢𝐭 𝐖𝐨𝐫𝐤𝐬.
Here, investors pool funds and invest in income generating property. For example, let's say an I-REIT manages assets worth Ksh1 billion. They divide these assets into shares, typically priced at a certain amount per share.
They can be split into small units worth Ksh20 each - meaning there will be 50 million shares floated for sale, each going for Ksh20. You can then buy these shares to own a piece of this building. Thus, if you were to invest Ksh50,000 in the I-REIT in the example abo, you would have 2,500 shares (Ksh50,000 ÷ Ksh20 per share).
If the value of the building increases, your investment also grows. Let’s say after one year, the value of this building increases from Ksh1 billion to ksh1.2 billion.
Since there are a total of 50 million shares, the new price per share would be Ksh24. The value of your 2,500 shares would be Ksh60,000 (2,500 shares × Ksh24 per share), resulting in a Ksh10,000 increase in the value of your investment.
The rent collected is distributed to the investors and unlike in listed companies where companies have the leeway on how to spend their profits, Kenyan law requires I-REITs to pay out at least 80% of their net earnings to investors.
For example, if the building in our example recorded is sharing Ksh100 million rent to shareholders, each share gets a dividend of Ksh2. If you had put in Ksh50,000 for 2,500 shares, your payout becomes Ksh5,000.
Advantages of REITS
Long Term Returns- REITs offer investors competitive returns as their performance is based on the performance underlying real estate assets in the REIT structure.
Liquidity-REITs offer investors’ enhanced liquidity compared to direct ownership of real estate assets. REITs thus enable investors to easily buy and sell units in a trust which has invested in real estate assets.
Consistent Income Stream– REIT structures specifically income REITs are mandated by the law to distribute at least 80% of their net after tax profits to their unit holders as dividends. This can provide a stable and consistent form of income annually for unit holders.
Diversification– When combined with other asset classes, REITs provide a unique diversification tool when incorporated in an investment portfolio.
Tax Benefits– REITs enjoy various tax considerations making them an attractive asset class for investors. REITs are exempt from income tax except for payment of withholding tax on interest income and dividends. Equally, REITs are exempt from stamp duty, value added tax as well as capital gain tax in some instances.
However, REITs, like any other venture, have shortcomings. They include;
The decrease in rental income as a result of the termination of lease agreements or non-renewal of lease agreements and failure to secure to secure replacement tenants in good time.
For close-ended REITs, the investor is not able to access their investment before the end of the investment period. The investor cannot seek to redeem his investment before expiry of the investment period unless there is an arrangement with the Trustee’s consent for the sale of the Investor’s units.
Economic and political situations that could lead to depreciation in the value of the property.
Change in taxes – While REITs are currently exempt from VAT and stamp duty taxes, these benefits may change depending on the regime in place.
Competition from other assets classes e.g treasury bills and stocks.
Limited pool of investors especially institutional investors like pension schemes who are only allowed investment to a tune 30% of asset of trustees.
How to Invest in Real Estate Investments in Kenya.
Investing in REITs is a straightforward process, and there are several avenues available:
Buying REIT Shares on a Stock Exchange.
Publicly Traded REITs: These REITs are listed on stock exchanges like the NSE. Investors can purchase shares through a brokerage account.
Trading Platform: Use online trading platforms or engage a stockbroker to execute trades on your behalf.
Research: Analyze the REIT’s portfolio, management team, and financial performance before investing.
Investing in REIT Mutual Funds or ETFs.
Diversification: REIT mutual funds and Exchange-Traded Funds (ETFs) invest in a basket of REITs, offering diversification.
Professional Management: Fund managers select REITs based on research and market analysis.
Lower Minimum Investment: Mutual funds often have lower entry requirements compared to buying individual REIT shares.
Participating in Private REITs.
Non-Traded REITs: These are not listed on public exchanges and are typically available to institutional or accredited investors.
Higher Yields: Potential for higher returns due to the illiquid nature and longer investment horizons.
Due Diligence: Assess the investment, as private REITs may carry higher risks and lack transparency.
Steps to Start Investing.
1. Open a Brokerage Account: Choose a reputable brokerage firm registered with the CMA.
2. Fund Your Account: Deposit the amount you wish to invest.
3. Select a REIT: Research and choose a REIT that aligns with your investment goals.
4. Place an Order: Buy shares through your broker or online trading platform.
5. Monitor Your Investment: Keep track of market trends, REIT performance, and industry developments.
Can foreign investors participate in Kenyan Real Estate Investments?
Yes, foreign investors can invest in Kenyan REITs, subject to CMA regulations and any restrictions on foreign ownership in certain sectors.
What factors should I consider when choosing a REIT to invest in?
Consider the REIT’s property portfolio, management team’s expertise, financial performance, dividend history, and market reputation. Also, assess the sectors and locations the REIT invests in and their growth prospects.