Investment Opportunities in Kenya: A 6-Part Series

Part I: Real Estate Investment Trusts (REITs)

Have you ever thought of investing in the real estate market in Kenya without having to spend
huge sums of money purchasing land, residential or commercial properties? This article
explores an innovative means of investing in the Kenyan real estate market through Real
Estate Investment Trusts.

An investor in a REIT can own a part of a high-quality real estate, such as office blocks, high-
rise apartments, hotels, shopping malls and warehouses without having to pay the high
property acquisition costs. These investors have the opportunity of having the real estate
property managed by professionals in the real estate industry, thereby reducing investment
risks while enjoying the benefits of high dividend and return on investment (ROI).

REITs were introduced in Kenya in 2013 with the promulgation of the Capital Markets (Real
Estate Investment Trusts) (Collective Investment Schemes) Regulations, 2013. Currently there
are 3 registered REITS listed in the Nairobi Securities Exchange, namely; ICEA Lion I–REIT
(formerly Ilam Fahari I-REIT) listed in November 2015, Acorn D-REIT listed in February 2021 and
Acorn I-REIT listed in February 2021.

Despite a slow start in the Kenyan market, Real Estate Investment Trusts or REITs, as they are
commonly known, are slowly gaining traction and are expected to be at the forefront of the
real estate sector in Kenya.

Introduction

A REIT is a regulated collective investment vehicle that enables persons to contribute money’s
worth as consideration for the acquisition of rights or interests in a trust that is divided into units
with the intention of earning profits or income from real estate as beneficiaries of the trust.
The REIT owns and typically operates income-producing real estate or related assets. These
may include office buildings, shopping malls, apartments, hotels, resorts, self-storage facilities,
warehouses and mortgages or loans. Unlike other real estate companies, a REIT does not
develop real estate properties to resell them. Instead, a REIT buys and develops properties
primarily to operate them as part of its own investment portfolio.

REITs allow investors to invest in already existing large scale, income-producing real estate
property or in properties being developed, like they would gain stake in a company. REITs
may operate in different ways. There are those that may acquire land, develop it and sell it
at a profit (D-REITs), and those that may acquire already developed property or even
develop the property for purposes of generating rental income (I-REITs). In the latter case,
they will hold and manage the properties over a period of time.

The Nairobi Securities Exchange (NSE) became the fourth African bourse to launch the Real
Estate Investment Trust (REITs) market in Kenya in 2013. This was motivated by the gap in
accessing diverse funding mechanisms for developers’ construction projects in the real estate
sector.

In Kenya, REITs may be listed or unlisted. A listed REIT’s units are traded on the Nairobi Securities
Exchange like any other company share, offering investors a liquid stake in real estate. In
practice, I-REITs are available for purchase to the general public, while the D-REITs are
restricted to professional investors only.

To help improve accountability and transparency within the REIT structure, there are four key
parties who all work together to ensure that REITs interests are fully protected. These parties
include:

i. The Promoter: This is an individual or parties involved in setting up a real estate

investment trust scheme. The promoter is regarded as the initial issuer of REIT securities
and is involved in making a submission to the regulatory authorities to seek for approval
of a draft trust deed, draft prospectus or an offering memorandum. For instance, in
the existing Acorn D-REIT, Acorn Investment Management is the promoter;

ii. The REIT Manager: This is a company that has been incorporated in Kenya and has
been issued a license by the authority (CMA) to provide real estate management and
fund management services for a REIT scheme on behalf of investors. There are
currently 10 REIT Managers in Kenya, namely Cytonn Asset Managers Limited (CAML),
Acorn Investment Management, Stanlib Kenya Limited, Nabo Capital, ICEA Lion Asset
Managers Limited, Fusion Investment Management Limited, H.F Development and
Investment Limited, Sterling REIT Asset Management, Britam Asset Managers Limited,
and CIC Asset Management Limited;

iii. The Trustee: This is a corporation or a company that has been appointed under a trust
deed and is licensed by the regulatory authorities to hold the real estate assets on
behalf of investors. The Trustee’s main role is to act on behalf of beneficiaries, usually
the investors in the REIT, by assessing the feasibility of the investment proposal put
forward by the REIT Manager and ensuring that the assets of the scheme are invested
in accordance with the Trust Deed, and,

iv. The Project/Property Manager: The role of the project manager is to oversee the
planning and delivery of the construction projects in the REITs. The property manager
on the other hand plays the role of managing the completed real estate
development that has been acquired by the REIT.

NSE listed REITs are held to the same standards and requirements of disclosure to investors on
financial information and reports on material business developments and risks as other
publicly traded companies. As such, transparency in REITs operations provides a basis for
investors to analyze and appraise REITs assets independently.

Types of REITs

There are three main types of REITs and they include:

• Income Real Estate Investment Trusts (I-REITs): This is a real estate trust that primarily
derives its revenues from rental properties. The investors pool their capital for purposes
of acquiring long term income generating real estate including housing, commercial
and other real estate. The investors then gain returns through rental income and
capital appreciation from the investments undertaken;
 • Development Real Estate Investment Trusts (D-REITs): This is a type of real estate trust
where resources are pooled together for purposes of developing and constructing a
real estate project. Once a development has been completed, a D-REIT may be
converted to an I-REIT and here the investors may choose to either re-invest their funds,
sell or lease their shares; and

• Islamic Real Estate Investment Trusts: This is a unique type of REITs which only
undertakes Sharia compliant activities. This REIT is Sharia law compliant with reference
to the tenants it leases the property to, the method and terms of borrowing, insurance
contracts and the type of real estate it invests in. Islamic REITS are required to have
a Sharia adviser to ensure compliance with the Sharia principles. A fund manager is
also required to do a compliance test before making an investment in this type of REIT
to ensure it is Sharia compliant.

Legal framework governing REITs in Kenya

The law related to REIT was introduced by the Capital Market Authority of Kenya in June 2013,
marking REITs as an Investment asset class for potential Real Estate investors, to use it as
vehicle to tap the dynamic and rapidly expanding Kenyan Property Market.

REITs operate under the Capital Markets (Real Estate Investment Trusts) (Collective Investment
Schemes) Regulations, 2013 and the NSE Listing and Trading Rules. The Capital Markets (REITs)
(Collective Investment Schemes) Regulations is the key regulation for issuance and continued
trading of REITs on the Nairobi Securities Exchange. Under these rules, REITs are structured as
trusts rather than companies. This means that the properties are held in the name of a
corporate trustee, who is the custodian of the REIT assets, but are managed by a corporate
REIT manager.

In addition to the required distribution of 80% of income as dividends under the Regulations,
other key regulatory considerations for I-REITs include a requirement that 75% of their Net Asset
Value be in income-generating properties for the first two years of listing, and that no more
than 50% of ownership be held by the primary sponsor.

In accordance with the CMA regulations, a REIT:

• Should be structured as an unincorporated trust which is divided into units;

• Should be established under a trust deed which shall bind the promoter of the trust,
the REIT Manager and all investors in the trust;

• Should have a trustee who shall specifically acknowledge the fiduciary obligations
and specifically the fact that they hold the assets for the benefit of the unit holders;
and

• Should have a REIT Manager which is a company authorised to provide real estate
management services in respect of a REIT. The trustee cannot be a REIT manager.

Once the above requirements are met, the promoter of the REIT together with the trustee
submit a joint application to the Capital Markets Authority for the granting of authorization as
a REIT. The authorization is critical as only authorized REITs can offer units to the public and
also be exempt from corporate income tax as per the Income Tax Act.
Tax Incentives offered to REITs in Kenya

REITs enjoy various tax considerations making them an attractive asset class for investors.
These tax benefits include:

i. A REIT that complies with the REIT Regulations and remains registered with the Capital
Markets Authority and the Commissioner of Taxes as well as a REIT investee corporation
enjoys corporate tax exemption as provided by the Income Tax Act, section 20.
However, REITs are not exempt from withholding tax on interest income and dividends.
Withholding tax on dividends is charged at 5% for residents and 10% for non-residents,
while Withholding tax on interest earned is charged at 15% for both resident and non-
resident unit holders;
ii. When a REIT distributes its income to its unitholders, the same will be deemed to have
already been taxed. Therefore, unitholders are not required to account for further
taxation;
iii. Section 33 of the 1st Schedule to the VAT Act provides that the transfer of assets and
other transactions related to the transfer of assets into real estate investment trusts and
asset-backed securities are exempt from VAT; and
iv. Transfer of properties to a REIT attract a stamp duty exemption, as per Section 96A (1)
(b) of the Stamp Duty Act.

Investment Benefits and Challenges associated with REITs

Below are some of the benefits associated with investing in REITs:

• Competitive Income and Long-term returns - The performance of REITs is derived from
the real estate investments and over time, real estate investments have outperformed
most asset classes. REITs offer strong long-term total returns. Excellent long-term
performance and strong diversification attributes make REITs a natural component of
a well-balanced and efficiently performing portfolio. REITs own tangible assets and
often sign their tenants to long-term lease contracts hence, REITs tend to offer greater
stability on the market;

• Liquidity - The REITs listed on securities exchange offer liquidity advantages for investors
over the direct investments in real estate assets. The advantage of liquidity also
extends to real estate developers as well since they may not need to completely sell
their entire assets if they are seeking for some little liquidity. A REIT can more easily be
bought or sold. Investors do not have to deal with the complexity of selling a physical
property. REITs allow an interested real estate investor to buy units (shares) and be a
part owner of a real estate asset without having to deploy a lot of capital, compared
to buying an entire piece of property;

• Stable and Consistent Income Stream - Investors especially those who take the I-REIT
option have the advantage of getting rental income thus guaranteeing a stable and
consistent income stream. I-REITs are required by the law to pay of at least 80.0% of
their income to their unit holders in form of dividends;

• Taxation Benefits - REITs generally have a number of tax benefits which include; i) REITs
registered by the Commissioner of Income Tax are exempted from income tax except
for the payment of withholding tax on interest income and dividends, ii) transfer of
 properties to a REIT also attracts a stamp duty exemption, as per Section 96A (1) (b)
of the Stamp Duty Act, and, iii) REITs’ investee companies are exempted from income
tax as provided under Section 20 of the Income Tax Act;

• Transparency - REITs provide operating transparency mainly because of how they are
structured and operated. Additionally, the listed REITs are registered and regulated by
the securities market regulators, adhering to high standards of corporate governance,
financial reporting and information disclosure;

• Low-Cost Exposure to Real Estate - REITs offer access to the property market with
professional investment management at a relatively low transaction and
management cost. A professional, dedicated management team responsible for the
day-to-day operation of the business, provides the investor with expertise beyond his
or her knowledge base; and

• No Shareholder Liability - As is the case with equity investments in other publicly traded
companies, shareholders have no personal liability for the debts of the REITs in which
they invest.

Challenges facing the adaptation of REITs in Kenya

• High Minimum Capital Requirements for a Trustee of Kshs 100 million - This essentially
limits the eligible trustees to only banks, efficiently eliminating corporate trustees and
other fund managers;

• Subdued Performance of the Real Estate Market - Some real estate sectors have
experienced sluggish growth especially after 2020, which is attributed to the impact
of the COVID-19 pandemic especially in the retail and commercial sectors and hence
a resultant drop in the occupancy and rental returns;

• Inadequate Investor Knowledge - REITs have been existence in the Kenyan market for
the past 9 years, however, the popularity of the instrument has remained low mainly
due to inadequate investor awareness or education on REITs, hence low investment
in the market;

• High Minimum Investment Amounts Set at Kshs 5 million - Based on the current
regulations, the minimum investment amount for a D-REIT is 5 million, priced at 100X
the medium income in Kenya. This is considered too high and might limit investors from
preferring it as an investment option; and

• Inconsistent Income - Rental income may be inconsistent over the investment period,
attributable to various factors such as termination of lease agreements and failure to
renew the same or secure tenants in good time for income continuity. Efficient
management of REITs becomes a key factor in the realization of good returns.
Conclusion

The introduction of REITs in Kenya has changed the way Real Estate Business is carried out in
Kenya. It has opened up premier mega projects to small and medium scale investors who
would not otherwise access ownership to such projects, due to the high capital required to
set them up.

Generally, REITs are a good investment option as they provide investors the opportunity to
participate in real estate projects. One of the main factors affecting the performance of the
REITs market is minimal investor knowledge on the instrument. However, the REITs market in
Kenya has a potential for growth with increased government support, and public sector
sensitization of the REITs.

Additionally, note that, before investing in a REIT, due diligence as with every other
transaction should be undertaken so as to inform your investment decision. One is also
advised to invest in REITs that offer better transparency as the ultimate goal is to generate
regular income or earn capital gains or both. The question you need to answer is, is this type
of investment in line with your financial goals? If yes, then what are you waiting for? If not
check out other investment opportunities until you find the best fit.