Why Kenyans are yet to warm up to real estate investment trusts
The introduction of Real Estate Investment Trusts (Reits) as an investment vehicle for players in real estate at the Nairobi Securities Exchange (NSE) in 2015 was billed as a game changer.
But far from it, the market segment has faced numerous challenges. Through Reits the Capital Markets Authority (CMA) had handed property managers and developers the easiest route to own and manage their offices, apartments, warehouses and shopping malls.
The Reits Association of Kenya (RAK) Chairman Edward Kirathe said developing and managing real estate in Kenya has been tedious and opaque.
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In an interview with Financial Standard, Mr Kirathe said most top real estate moguls made their money at independence and managed these property holdings privately without much help from professionals.
They did not know much about Reits. “These grandees had accumulated a lot of wealth and pumped it into real estate,” he said, noting that they had invested in land, buildings in the city, high-end hotels at the Coast and top private schools.
“The problem came when they aged and had to leave the holdings to the next generation. Some of their children were not well versed in managing these properties and when they died, legal tussles followed and sometimes the properties fell into ruin and were auctioned,” explained Kirathe.
According to him, Reits were considered beneficial to the industry and the saviour to the wealthy elderly property holders.
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The first to join this investment vehicle in 2015 was the Stanlib Fahari I-Reit which remains the first and only Reit listed at the NSE. The firm has shed almost 50 per cent of its value since the listing while the share price has remained in the range of Sh10 and Sh14.
Analysts have blamed Stanlib Fahari I-Reit’s bad performance at the bourse on the poor grasp of the workings of Reits by investors.
In 2016, a local developer Fusion Capital failed to raise Sh2.3 billion it targeted from its own Development Real Estate Investment Trust (D-Reit).
CMA had required Fusion Capital to raise at least half of the initial gross proceeds it had targeted through a D-Reit before it could qualify for listing in the market segment.
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The firm quit the D-Reit and raised the money privately.
The CMA director for market operations Wycliffe Shamia said despite legislative interventions meant to make Reits more attractive to investors, the option is still performing poorly as an investment vehicle at the Nairobi bourse.
The Government has exempted Reits from stamp duty, only taxing emoluments accrued as interest income and dividend.
“Reits make investments in real estate easy because an investor can simply make his investment liquid by trading it. But still, investors have shunned them and are clung on the old, conservative ways of investing in solid assets,” said Mr Shamia.
He said the minimum of Sh5 million that investors in a Reit are required to put up is a put-off, adding that it is too high for a common investor.
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Reits also target pension funds, although fund managers have not been keen on them.
According to Retirement Benefits Authority Chief Executive Nzomo Mutuku, they only allow fund managers to invest up to 30 per cent of their funds in Reits.
But currently, the managers have only put 0.04 per cent of their wealth there.
“We used to consider investments in real estate to be a bit opaque. But when Reits came, we considered them open and liquid. We encourage fund managers to put money in them but still, they don’t,” said Mutuku.
The Kenya Railways Staff Retirement Benefits Scheme, which holds real estate assets to the tune of Sh150 billion, has failed to pay its pensioners due to the assets being in solid form and cannot be easily liquidated.
If these assets were held in a Reit, it could be easy to liquidate them and pay the retirees.
Hosea Kili, the chairman of the Kenya Pension Schemes Administers, blames the schemes for the failure of fund managers to put money in Reits.
“You see, when we hire a fund manager, we measure their performance with the returns they give us. We give them points and when they don’t hit those points, we fire them,” said Mr Kili.
“Very many fund managers are afraid to lose money in Reits since they hardly understand them.” Reits have been around for three years now and have not been able to crack into the Kenyan market. Whether they will succeed or die altogether is a riddle only the future can answer.
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NSEReitsReits Association of Kenya