Real Estate Investment Trusts (REITS) are set make a debut at the Nairobi Securities Exchange (NSE). The CMA has been pushing for establishment of public Reits in Kenya for many years. With the recent growth and maturity of the real estate sector this has been long overdue. Kenya will become the 41st country in the world to introduce REITS and second in Africa after South Africa.Why you should be interested in them and why this may be a turning point in the property market in Kenya. Treasury secretary Henry Rotich reading the 2013/2014 budget said the law on Real Estate Investment Trusts (REITs), would be enacted through an amendment to the capital markets rules.“I propose to amend the law to encourage pooling of resources through REITs for the sole purpose of real estate development,” said the Treasury Secretary.
WHAT ARE REITS
A REIT is a Real Estate Company/Corporation which owns, develops or manages different types of properties.They are investment instruments that source funds to build or acquire real estate assets which they sell or rent to generate income. REITs are traded like stocks and investors can buy and sell shares and are regulated by the Capital Markets Authority (CMA).The income generated is distributed to the shareholders at the end of a financial year.
REITs may choose to focus on one main genre of real estate or may diversify to all types.REITs in developed capital markets have been in existence in their present format since the 1960s, but they were actually were introduced in the 1800s.One of the advantages of Real Estate Investment Trusts is that they are exempted from double taxation; REIT schemes are exempt from corporation tax and are also exempted from income tax except for the payment of withholding tax on interest income and dividends.
Introduction of REITS in Kenya
Kenya’s property market has seen exponential growth over the years. Kenya property values have grown to become among the best in the world. House prices continue on increasing coming into 2013, rents in townhouses have increased by 3.8% in the first quarter of 2013.Interest rates for developments are still high and the market is extremely under supplied especially in housing for the lower segment of the market.
How would REITS benefit the real estate sector
The capital markets can help mobilize and allocate resources. REITS will enable mobilizations of savings from individuals and groups.This means groups and cooperatives will be able to invest in the market. Individuals will also get a stake in Real estate with investments of sums of as low as Ksh. 5000 depending on the structure of the REIT.
REITS will provide a chance for developers to go the capital market to raise funds. This may make financing developments competitive and thus reduce interest rates for developments. It may also force banks to review their mortgage rates downwards. REITs will also allow Kenya’s capital markets to have a strong role in the further development of the real estate sector.
Specialized REITs will be encouraged especially those involved in the low and medium cost residential properties. This will allow for more development of housing for this particular group which is under supplied. It is said that Kenya has a shortfall of 150,000 housing units every year.
Expected structure of REITs
REITs will be structured as close-ended trusts and encouraged to list on the Nairobi Stock Exchange. Private placements will also be allowed.
Development property will be restricted to 15% of the REIT value. This will help restrict the risk that comes with developing property.
To encourage existing property management companies and property investment companies to convert to REIT structures, majority ownership will be allowed up to 50% for the primary sponsor. All other investors’ stake should be restricted to a maximum of 25%.
A minimum of 100 shareholders will be required for a publicly listed REIT to help in ensuring liquidity.
It will be required that 90% of the income generated be distributed to shareholders as dividends.
The CMA is expected to set the minimum value of a publicly listed REIT to Ksh 50 million for those REITs specializing in low and medium cost housing. For those investing in high-end housing and/or non-residential properties, the minimum asset value will be Ksh 500 million.
REITS will be exempted from all taxes including:
- VAT on all rental income
- Corporate tax
- Any capital gains tax
- Stamp Duty on purchase/sale/transfer of properties
- VAT on professional services
For a country that imposes a 30% corporate tax REITs are sure to be attractive for investors. The CMA must ensure that Kenya Revenue Authority (KRA) recognises these incentives. The proposed framework in Kenya, unlike many other markets, proposes a hybrid model comprising Income REITs and Development REITs. Development REITs specialized in Residential properties are expected to provide more residential units which are in short supply compared to the demand. REITs will also give Kenyans a sense of ownership to a growing sector that seems aloof and benefitting a few in the country.