What is a REIT?
A Real Estate Investment Trust (REIT) is a professionally managed entity that is setup as a collective investment scheme primarily to own, operate or finance income-producing assets across a diverse range of real estate sectors for the benefit of their shareholders (or unitholders).
The income-producing real estate operated by REITs include among others, office buildings, shopping malls, apartments, hotels, resorts and warehouses.
REITs provide investors the chance to own valuable real estate, present the opportunity to access dividend- based income and total returns, and help communities grow, thrive, and revitalize.
A REIT can be listed on a stock exchange like stocks and investors can buy and sell shares. REITs in Kenya are listed at the Nairobi Securities Exchange (NSE) and are regulated by the Capital Markets Authority (CMA).
In most stock markets in the world, including Kenya, listed REITs are tax-exempt. This means that a REIT does not pay corporate tax like a company is legally required to. This has made REITs a popular investment option in development markets especially where the corporate tax rate is relatively high like in Kenya – 30% of net profit. Being able to save 30% that one would otherwise pay from their net profits in tax can significantly improve one’s investment return.
REITs were first introduced in the United States market in 1960 and have since expanded to more than 30 countries world-wide. In Africa, only South Africa has an active and vibrant listed REIT market. Kenya introduced regulations for REITs and listing was done in 2013.
REITs allowable in Kenya
In Kenya, the law allows for the existence of three (3) types of REITs: –
- Development REIT (D-REIT)
- Income REIT (I-REIT)
- Shariah REIT
Development REIT (D-REIT)
This is a REIT in which the investors pool their monies for purposes of undertaking development, construction and associated activities of real estate projects.
It is only open to professional investors (restricted offer) whose minimum subscription is KES.5M and requires a minimum of seven (7) investors.
The developer is expected to maintain a 10% minimum co-investment of the Net Asset Value (NAV) for the first two (2) years. NAV refers to the fair market value of both the real estate investments and cash & cash equivalents.
It must within 12 months invest at least 35% of Total Asset Value (TAV) in development. Total Asset Value refers to the purchase price of both the real estate investments and cash & cash equivalents of the REIT.
It can borrow up to 60% of TAV, unless trust documents impose a lower cap. Investors can, however, approve up to 75% gearing for up to six (6) months by ordinary resolution.
Once the development is complete, the investors in the D-REIT can convert it into an I-REIT. For conversion to occur, development assets must be less than 15% of TAV.
Income REIT (I-REIT)
This is a REIT in which the investors pool their monies for purposes of acquiring long-term income-generating real estate such as residential, commercial and other real estate.
It is open to all investors, both professional and retail hence can be either restricted or unrestricted respectively.
It must make at least one (1) investment in an income-generating real estate project within 180 days after close of offer and at least 75% of TAV within 24 months.
The developer is expected to maintain a 20% minimum co-investment of the NAV in the first year and 10% in the second year.
It can borrow up to 35% of TAV, unless trust documents impose a lower cap. Investors can, however, approve 40% gearing for up to six (6) months by ordinary resolution.
It must meet the threshold of KES.100Mn of total assets for a private I-REIT and KES.300Mn of total assets for a public I-REIT.
It is expected to distribute a minimum of 80% of its income annually.
Islamic REIT
An Islamic REIT is a REIT that is Shariah complaint. This compliance is ascertained by a Shariah advisor with regards to investment in real estate and non-real estate assets, rental of the premises, financing through Shariah compliant Islamic instruments and effecting of insurance of the assets with Takaful schemes.
Examples of prohibited activities include but are not limited to conventional banking services, gambling and casino operations, sale of liquor and non-halal food items. In case of mixed tenants (tenants engaging in both Shariah and non-Shariah compliant activities), the rental income from the disallowable activities to total turnover must not exceed 20%.
REITs requirements and obligations in Kenya
| Regulation | I-REITs | D-REITs | |
| 1. | Distribution of dividends to Shareholders | – At least 80% of the earnings. | – No limits on distribution requirements, but realized capital gains must be distributed. |
| 2. | Asset allocations | – At least 75% in real estate and up to 25% in cash. | – At least 30% in construction / developments or income producing real estate, within one year of authorization. |
| 3. | Income requirement | – At least 70% of income must be from real estate assets. | – May invest in development and construction projects. |
| 4. | Gearing | – Up to 35% of total assets value. | – Up to 60% of total assets value. |
| 5. | Co-ownership of assets | – This is prohibited except in case of units in another REIT. | – Permitted in case of part sale of developed property. |
Source: Sterling Research