New Real Estate Investment Trusts rules to enable developers build faster

Kenya: With the exit period reduced, a promoter’s capital is freed up in a short time, allowing them  to move on to new projects,  writes KEVIN OGUOKO

The Capital Markets Authority (CMA) has reduced the lock-in period for promoters of Real Estate Investment Trusts (Reits) to two years.

In the final Reits regulations it published early this month, CMA discarded the three-year lock-in period that had been recommended in the draft regulations.

Lock-in period is the time or number of years a Reits promoter (backers of a real estate project to be listed on the stock exchange) takes to exit the project.

During this period, promoters of real estate investment projects are barred from selling their shares at the stock market.

The reduction of the lock-in period from three years to two years is aimed at increasing the liquidity of promoters, who are basically developers. Increased liquidity frees up their capital, allowing them to move on to new projects, within the shortest time possible.

Reits will allow individual investors to buy and sell shares of properties listed on the Nairobi Securities Exchange, in much the same way people trade in stocks and shares of companies listed on the bourse.

This will change real estate from a capital-intensive investment to a “commodity” that can be traded in on the bourse.

Categories

“The promoter may, after the first year of the close or listing, reduce its holding to a minimum of ten per cent and second anniversary of the close or listing, reduce its holdings to zero per cent,” the regulations read in part.

The Reits are in two categories: Development Reits (D-Reits) and Income Reits (I-Reits).

 I-Reits shares can be easily transferred to other shareholders through the Nairobi Securities Exchange like normal shares.

An I-Reit allows transfer of ownership of existing property to the public, thereby earning income through rents while a D-Reits is used to raise funds for new developments. D-Reits shares will not be floated on the Nairobi Securities Exchange.

The new regulations announced by the CMA retain the lock-in period of D-Reits at two years with the promoter holding a minimum of ten per cent. Financiers have said that quick exit of promoters should not be construed by the public as lack of confidence in a particular project.

“We welcome it (reduced lock-in period) because if you lock them in for a long time, then you are preventing them from doing more projects,” says James Karanja, the executive director of Kenya Building Society, a subsidiary of Housing Finance.

The regulations are waiting to be tabled in Parliament for debated before being gazetted. If gazetted, Kenya will be the 41st country in the world and second in Africa after South Africa to list Reits on its stock exchange.

Tax

According CMA acting CEO, Paul Muthaura, Reits schemes are exempt from corporation tax. Additionally, investors in Reits are exempt from income tax except for the payment of withholding tax on interest income and dividends.

Corporate tax exemption was a critical element in the development of Reits since their introduction in the 1960s in the United States.

However, some stakeholders are pointing out that management of Reits could be hampered by lack of project managers in Kenya.

In the building and construction industry, the role of a construction project manager entails the overall planning, coordination and control of a project from inception to completion. The manager is the bridge between the architect and the client and ensures that the client’s requirements are being met.

Checks

This, however, might not be such a serious problem since CMA regulations have been formulated with checks and balances in the operations of the Reits.

The Treasury is planning to issue Kenya’s first Eurobond by the end of September to plug the huge funding gap in its Sh1.64 trillion national budget. Rwanda, a much smaller economy than Kenya, recently raised Sh34 billion ($400 million) through a Eurobond.

But as it turns out, Eurobonds are in a continuous surge as yields in Italy and Ireland are on record-lows.

“With the situation abroad, the Government will be forced to come back to the market to source for funds to finance the budget deficit. This will ultimately increase the mortgage interest rates,” says Frank Ireri.

The government’s sourcing of money from the market will make Reits and other securities less attractive, thereby hurt already established projects, as they will be in competition with Reits and other securities.