The Kenyan real estate market and the introduction of Real Estate Investment Trusts
The past decade has seen significant growth in most key sectors of the Kenyan economy, thanks to a vibrant private sector and the ever-increasing foreign appetite for investments in Africa. Indeed, Kenya has been the preferred hub for multinationals and other international organisations with operations in East and Central Africa. In response, the Kenyan Government has invested heavily in infrastructure development, while taking steps to improve the legal and regulatory framework in key sectors of the economy.
Evidence of investor confidence in the Kenyan real estate and construction market, especially in relation to commercial property, is Old Mutual Property’s recent investment in the Two Rivers Mall. UK-based Old Mutual invested KES 6.4 billion in the holding company of Centum’s Two Rivers Mall, giving it an equivalent 50% stake in the firm. The country has also seen investments from the Delta Africa Property Fund, Retail Africa and Abland – all from South Africa. AVIC International Holding Corporation of China is also expected to invest over US$ 200M in constructing their Africa Headquarters in Nairobi. The multi-user development has been reported to contain the highest office block in East Africa and will undoubtedly reshape Nairobi’s skyline.
The spill-over effect of this increased demand for real estate, however, is the high cost of developing new property. The market is facing extreme under-supply especially in housing for the lower segment of the populace; so much so that a tax incentive was recently introduced into law which entitles developers who put up at least 400 low cost residential units to pay a reduced corporation tax rate of 15% (down from 30%).
It is against the backdrop of the enactment of the Capital Markets (Real Estate Investment Trusts) (Collective Investment Schemes) Regulations, 2013, that the Nairobi Securities Exchange became the fourth African bourse to launch the Real Estate Investment Trust (REITs) market in the 2013. REITS are regulated investment vehicles that enable collective investment in real estate. Investors, both retail and corporate, pool their funds under the REIT umbrella to invest in real estate projects.
The launch of REITs was meant to further enhance financial inclusion in Kenyan capital markets. REITs would provide average investors belonging to the growing middle-income segment the opportunity to invest in large-scale commercial, residential and industrial properties, without requiring large sums of money. It was hoped that investors would gain from (i) the income and capital appreciation of the portfolio of properties in which a REITs fund was invested and (ii) the creation of a liquid market in immovable property.
REITs in Kenya are structured as trusts rather than companies. The properties are held in the name of a corporate trustee who is the custodian of the REIT assets but managed by a corporate REIT manager. There are two types of REITs - development and construction REITs and income REITs. Securities in the former can only be offered to professional investors who understand development risks. However, income REITs can be offered to both professional and retail investors.
The first income REIT was listed at the Nairobi Securities Exchange late last year by Stanlib, which is controlled by the Liberty Group of South Africa. As at 10 Feb 2017, the Stanlib Fahari income REIT ranked 32nd on the Nairobi Securities Exchange in terms of returns to investors with a year-to-date loss of 9.62%.Registered REITs are a tax efficient structure, in that, except for the payment of withholding tax on interest income and dividends, the REIT itself is not subject to income tax. Additionally, instruments used in the transfer of property to listed REITs are exempt from stamp duty.
Going forward, specialised REITs could be encouraged in Kenya, especially those relating to low and medium cost residential properties, which are seeing higher returns than high cost properties and where there is a lot of demand. This will also allow for more development of housing for this group. While the performance of Kenya’s first REIT may be somewhat disappointing, it is expected to grow in popularity as its long term investment potential becomes apparent to investors.