Understanding Real Estate Investment Trusts (REITs) in Kenya

Photo by Breno Assis / Unsplash

Real estate investing can seem both daunting and unattainable to the average investor - and for good reason.

It’s neither easy nor cheap to buy, develop, or operate a real estate asset profitably. That’s because it requires a lot of money to start and access to specialized expertise to run smoothly.

Both of these are hard to find, so this presents a huge barrier for the beginning investor. But REITs exist to solve this problem.

What is a REIT?

A Real Estate Investment Trust is a collective investment scheme that specializes in real estate investing.

A Collective Investment Scheme is an investment vehicle that pools money from many investors, creating a larger pool of resources. These are then invested in various assets like stocks or bonds with the sole aim of making money while minimizing risks.

REITs consist of investors who pool their funds and then invest in real estate. They achieve this by using the collective resources to appoint a real estate professional who buys, develops, and manages properties on their behalf.

These properties, which may include shopping malls, office buildings, apartments, etc. are then used to make money in one of two ways:

  • Through rental income, or
  • By selling them off at a profit

The investors then receive this income as dividends.

REITs, therefore, solve the dual problem of capital (collectively, the investors have enough money to invest) and expertise (collectively, they can afford to hire a pro).

How do REITs in Kenya work?

REITs in Kenya are regulated by the Capital Markets Authority (CMA) and involve four key players: a promoter, a trustee, a property manager, and the REIT manager.

  • Promoter – This is the party responsible for setting up the REIT. The promoter forms the REIT, creates the REIT securities, finds like-minded investors, prepares all the relevant documents, and ensures all legal and regulatory procedures are followed.
  • Trustee – the trustee acts as the custodian of the REIT. All of the REIT’s assets are held by the trustee, who acts on behalf of the investors. The trustee’s main role is to ensure that all investments are made as per the set objectives and that all legal and regulatory conditions are met.
  • Property manager – is responsible for providing the expertise required by the REIT. The property manager oversees the planning of the construction projects and their delivery.
  • REIT manager – This is the CMA-approved party in charge of managing the REIT’s funds. The manager oversees the development of the assets, collects rental/sale income on behalf of the investors, and maintains proper financial records.

Once the promoter forms the REIT by creating the collective investment scheme, the trustee takes over and appoints the managers, who deal with the day-to-day running of the project.

Types of REITs in Kenya

REITs are classified according to their specific objectives. There are 3 types in Kenya. They include:

  • Income REITs – Also called I-REITs, they are formed to provide regular income to their investors. As such, they specialize in owning rental properties although they also benefit from capital gains when the underlying value of their properties increases. There are two income REITs in Kenya: Acorn I-REIT and ILAM I-REIT.
  • Development REITs – Unlike I-REITs, D-REITs don’t own or operate any assets. They specialize in the development and construction of real estate properties, which are then sold and the proceeds distributed to investors. However, the investors can choose to convert the D-REIT into an I-REIT and start earning rental income from it. There’s one D-REIT in Kenya, the Acorn D-REIT, which owns the Qwetu and Qejani brands.
  • Islamic REITs – These are Shari’ah-compliant REITs that also undertake income-producing projects. The fund manager conducts compliance checks on properties before investing to ensure they comply with Shari'ah standards and that non-permissible activities don’t take place. There are currently no Islamic REITs in Kenya.

Why invest in REITs?

REITs are perfect for small or beginning investors who would ordinarily be constrained by cost and expertise factors. They offer several other advantages, including:

  • They provide passive incomeI-REITs own rent-generating assets that provide rental income. They are required by law to distribute at least 80% of their income through dividends. So by owning them, you are well-positioned to earn a consistent income.
  • They are good for diversification REITs reduce your exposure to certain investing risks because real estate is fundamentally different from typical assets like stocks and bonds. You’ll be investing in shopping complexes, rental assets, offices, and industrial buildings as part of a collective.
  • Tax advantages – registered REITs are exempted from capital gain tax, value-added tax, stamp duty, and income tax (except withholding tax applicable to interest and dividends). This translates to reduced expenses on the part of the trust, which trickles down to investors in the form of additional income.
  • Easily convertible to cash/Liquidity – ordinarily, it takes time and a maze of procedures to list and sell real estate. You have to find agents, negotiate with prospects, and settle legal requirements before you see a penny from your assets. With REITs, however, selling is fast and simple. By simply selling your shares, you’ll access your money in less than a day.
  • Long-term return – Over a long time frame, REITs can provide competitive returns compared to other asset classes. Their performance depends on the occupancy rates of their buildings and the demand for rental space in the market, which is always on the rise.
  • Transparency/Openness – REITs are regulated by the CMA and have a very clear structure. They are easy to follow and understand, which means they are ideal for investors at any stage, beginner or otherwise.

What risks are you exposed to?

  • Systemic factors – these are risks that are outside the scope of control of the business. Things like political instability and poor economic performance can affect profitability. The Covid 19 pandemic, for example, had a massive impact on the retail and commercial space. As a result, rental income was affected and this caused reduced returns for REITs.
  • Unpredictable disruption of income – lease/tenancy agreements with the tenants in the properties might come under review and require renegotiation. And once a tenant moves out, it may be a while before a new one moves in and this may disrupt the income flow of the property.

How to buy REITs in Kenya

As mentioned, there are three REITs in Kenya: ILAM Fahari I-REIT, Acorns D-REIT, and Acorns I-REIT. Here’s how you can start buying each of them:

  • ILAM Fahari I-REIT – This is the only REIT listed in the Nairobi Securities Exchange. It owns a host of properties around Nairobi, including Greenspan Mall and 67 Gitanga Place. To become an investor, one needs to buy shares through the usual process of finding a broker, opening up a CDS account, and making an order. The minimum number of shares you can buy is 100 and each share goes for roughly KES 7-10, so you can start with KES 1000 or less.
  • Acorn D-REIT and Acorn I-REIT – owned by Acorn Holdings, these REITs are very easy to buy. Acorn developed the Vuka platform where investors can sign up for an account and begin to buy shares. The lowest category for individuals, the Silver package, costs 499 to join and another 499 as annual fees. Again, with less than KES 1000, you are ready to start investing here.