How you could own a piece of prime real estate(2011-06-16)
Mention the term real estate investor and what comes to mind is a well-heeled individual who can put millions of shillings into a building project with relative ease. Because of its capital-intensive nature, real estate investment is for the rich. The less materially-endowed Kenyan majority, just as happens in many other economies, have to join forces and pool resources if they want to invest in the property market. Happily, that is about to change, thanks to a new investment window that seeks to allow real estate to be traded on the Nairobi Stock Exchange. The Capital Markets Authority has drafted rules for a special investment vehicle known as Real Estate Investment Trusts (REITs) that will allow individual investors to buy and sell shares of properties listed on the bourse in much the same way people trade in stocks and shares of companies listed on the stock exchange. Large investors will be allowed to raise money from the public through the capital market, making it possible to channel capital into the real estate sector in a more structured manner. Hailed by property experts as revolutionary and innovative, the move is seen as the answer to the need for a savings and investment vehicle that will result in a liquid property market (investors can easily liquidate their investments by simply selling their shares at the stock exchange) that is widely accessible to the private investor. “REITs are intended to open up investment in the usually capital-intensive large-scale commercial property sector to the general public. They will, for the first time in Kenya, facilitate the ‘chopping up’ of real estate into small units for people to trade in them,” says Mr Reginald Okumu, a former chairman of the Institute of Surveyors of Kenya (ISK). He adds that REITs will reduce the sector’s dependence on high levels of debt financing, which increases its sensitivity to interest rate changes and makes investment in property less transparent and more risky and costly than it ought to be. To benefit most are the millions of smaller investors who cannot invest in real estate because of the huge capital outlay required or if they do, they tend to access property in higher risk ways such as buy-to-let investments or direct ownership, and therefore cannot diversify investments to reduce risk. Large investors will be required to register a real estate investment trust under the Trustee Act with the Capital Markets Authority. The trust will raise capital from the market and invest it in real estate projects — whether commercial or residential — on behalf of shareholders with the aim of providing returns to unit holders. The returns will mainly be in the form of rental income or capital gains accrued from the real estate investment. A real estate investment management company, incorporated under the Companies Act Cap 486 and registered with the Capital Markets Authority, will manage the real estate investment schemes acquired by the trust on behalf of the investors. Properties acquired by the trust and managed by the company will be listed on the stock exchange where people wishing to invest in real estate will have the opportunity to buy shares and trade in them. The company decides the kind of real estate investments to go for, based on the amount raised by subscribers for the trust. REITs will typically invest in real estate or related assets. These can vary from shopping centres to office buildings, hotels, and mortgages secured by real estate. The move, according to CMA, is part of the regulator’s efforts to pursue available investment opportunities in the capital markets aimed at stimulating the economy, as envisioned in Vision 2030. According to CMA, the regulations will provide incentives for the development of and investment in certain classes of real estate such as low-income housing, municipal amenities, and tourism facilities, which are considered to be priority areas for national and regional development And the prospects of the country embracing such an innovative investment vehicle are good. In his Budget statement last week, Finance minister Uhuru Kenyatta showed the government’s commitment to establishing REITs when he announced that companies trading in the trusts would be exempted from corporation tax and individual investors from withholding tax, meaning that they would receive tax-free returns on their investment. Mr Kenyatta announced this despite the fact that REITs regulations, which the Capital Markets Authority has been working on since 2009, are yet to come into force. The regulations were circulated for comment by stakeholders and the public from April 15 to May 15, 2009. After that, the Capital Markets Authority said it would be holding consultations with all stakeholders “as we have received substantial comments” before the document is forwarded to the minister for Finance for his consideration and approval. “The public has so far overwhelmingly supported the authority’s initiative. The general observation is that there is willingness to invest in the product as long as it is properly regulated and incentives are provided,” a source at CMA said then. But it was not until last week that the government indicated its commitment to introduce the special investment vehicle. One of the reasons for the delay, according sources, was how to go about taxation. One of the advantages of investing in REITs is the tax advantage enjoyed by the investors. REITs allow for tax rebates on gains. Thus, it is a tax efficient vehicle for many investors to put their funds into property. “This is achieved through the structure of REITs that allow them to be treated as pass-through entities for tax purposes, that is, the income is not taxed in the hands of the REITs but is passed on to investors who then pay tax in their individual capacity. This does away with double taxation,” Mr Fred Omondi of Deloitte Kenya, said in a newspaper article last week. If the regulations come into force, Kenya will join the league of developed economies such as the United States, the United Kingdom, Japan, Canada, Australia, and South Africa that have introduced REITs to encourage investment in real estate by the masses. “Treasury deserves credit for introducing these measures. It is hoped that the real beneficiaries will be the wider public seeking affordable housing,” said Mr Omondi, who argued that REITs provide an avenue for mobilising small and large investors to pool funds to finance property development. REITs, he said, ensures that many people and entities that would otherwise not afford to invest in property are able to participate. But the greatest advantage of investing in REITs is their ability to minimise risks. Unlike stocks and shares, REITs’ ability to mobilise huge resources make it possible for them to invest in a portfolio of property, thus ensuring a diversified range of assets which in turn minimises the risks likely to be faced by investors. Another reason that will make REITs investors happy is the strict regulation by the Capital Markets Authority. This will ensure that REITs are properly managed and the investors’ interests are well protected. The investor will, therefore, enjoy the benefits of experienced property management spearheaded by a carefully selected management team to handle marketing, rent collection, tenant management, and facilities maintenance. In terms of viability, experts say that REITs have enormous earning potential. Historically, they have performed well due to the steady long-term appreciation of real estate. This is due to real estate’s major characteristic of being a “hedge against inflati Courtesy of DN