Players in the Real Estate Investment Trusts (Reits) market have proposed relaxing regulations that require a trustee to have a minimum paid-up capital of Sh100 million as one of the ways of driving up the uptake of the investment vehicle.
Reits are specially designed investment vehicle which allows one to earn from real estate but without the capital intensity that comes with it.
They allow one to buy a piece of an investment for as low as Sh500 and receive dividends through rental income in the case of I-Reit.
The Reits Association of Kenya (RAK) in its latest newsletter, the association has made a raft of suggestions to the Capital Markets Authority (CMA), which if implemented, could help more investors embrace Reits.
They include revision of lease terms, regulations to support green financing and the need for a standard valuation method.
RAK also suggests the development of a secondary market for Reits, which would increase liquidity and make it easier for investors to buy and sell units.
This, the association says, would improve the performance of the market.
The association notes despite efforts from CMA to attract investment in the Reits market, the sector has few players.
These are Acorn Student Accommodation as the only Development Reit (D-Reit) and ILAM Fahari REIT, Acorn Student Accommodation I-REIT, and LAP Trust IMARA I-Reit Income Reit (I-Reit).
D-Reits are used by developers to source money for new projects, while I-Reits help in managing an already developed property for the purposes of getting an income.
RAK says the current regulatory regime has provided a conducive environment for the growth and development of the Reits market, and CMA has made significant strides in promoting this investment vehicle.
“However, there is still room for improvement, and the CMA could consider various reforms to further enhance the Reits market and make it an even more attractive investment vehicle for both domestic and foreign investors,” says RAK.
It adds that the government would also benefit from the proposals, including enabling Reits to play a more significant role in the development of the housing sector, thus making it more accessible to the public.
One of these proposals is relaxing the trustee and Reit manager requirements.
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“The current regulations require a trustee to be a bank or a subsidiary of a bank and have a minimum issued and paid-up capital of Sh100 million. These requirements may be overly restrictive as evident by the limited number of trustees licensed by the CMA,” the association says.
RAK adds that allowing Reit managers to manage multiple Reits would provide them with more flexibility and allow them to take advantage of economies of scale and expertise across different Reits.
“This would also allow for more efficient use of resources and could reduce overall management costs for Reits,” the association says. “The CMA could consider implementing several measures that would reduce the barriers to entry and make it more attractive for trustees and Reit managers to participate in the market.”
The lobby also proposes the promotion of green Reits and focus on affordable housing.
“Reits could be incentivised or required to have a certain percentage of their assets invested in affordable housing projects to address a social need while providing them with a stable source of rental income,” says the association.
“This could also help address the housing deficit in Kenya and provide a positive social impact. In recent years, there has been an increased focus on sustainable and green investments in Africa.”
The association wants the country to also look into introducing regulations that would promote the development of green REITs, which would invest in environmentally friendly buildings and development.
The association notes the importance of a standard valuation method owing to the different approaches between public and private real estate. RAK says listed Reits trade like any other shares despite the actual value of the estate.
“As some commentators have noted, investors in private and public real estate markets seldom agree on the valuation of the same asset, leading to divergence in property valuation.”
“It is important to have a robust valuation process in place that is transparent, consistent and in line with international best practices,” says the lobby in the newsletter.
This issue can be addressed by CMA requiring Reits to provide more detailed information about the properties they hold and also establish a standard valuation method that would be widely accepted by the market.
“The modification in the regulations will bring more transparency, flexibility and access to capital which are essential for the growth of the Reit market.
The Reit market in Kenya can be a major contributor to the country’s economy through the provision of affordable housing and additional income to investors,” the association adds.