REITs were introduced as an alternative financing source to address the funding gap and create a more inclusive market at a time when financing real estate projects were becoming difficult. However, they do suffer from low Real Estate Investment Trusts, or REITs, which are regulated collective investment vehicles that invest in real estate. REITs, in essence, allow the average person to participate as one of many investors in a real estate investment or development project.
Understanding the REIT Landscape in East Africa
REITs are a relatively new concept in Africa, with a low adoption rate across the board.
Only a few African countries have REITs as an investment scheme, with a few in East Africa, namely Kenya, Tanzania, Uganda, and Rwanda.
Only Kenya has made significant (though still insufficient) progress in incorporating REITs into their real estate markets among the four countries mentioned. Real Estate Investment Trusts (REITs) were established in Kenya in 2015 to help develop the country’s property market.
Under this structure, REITs were broken down into income REITs (I-REITs) and Development REITs (D-REITs). Some of the stipulated requirements include;
- I-REITs are required by the law to pay off at least 80% of their income to unit holders in the form of dividends.
- Minimum Capital Requirement for a Trustee was set at Kshs 100 million, which limits eligible trustees to only banks.
- The current minimum investment amount for a Development REIT is set at Kshs 5 million, which is considerably higher than the gross median income of Kshs 50,000 in Kenya.
Since their introduction, the Nairobi Securities Exchange has had several authorized Real Estate Investment Trusts in Kenya with the premiere REIT being the ILAM Fahari I-REIT. This closed-ended I-REIT has its units listed on the stock exchange. As a result, the market price of the Units is market driven and may not be equal to the Net Asset Value of the ILAM Fahari I-REIT. However, the I-REIT Scheme may undertake secondary offers if the need arises.
Of the Direct Property allocation, the I-REIT has permission to invest in the following sectors:
- Mixed-use developments
- Retail and commercial developments
- Industrial projects
- Hospitality and residential properties
- Specialized buildings such as student accommodation, schools, etc
Furthermore, the market has evolved to allow for alternative real estate asset class REITs such as the Acorn Student Accommodation Interest Real Estate Investment Trust (ACORN I-REIT) and Acorn Student Accommodation Development Real Estate Investment Trust (ACORN SAD REIT) (ACORN D-REIT)
This has created momentum for Kenyan industry players to work on introducing new products into the market, such as Islamic REITs and Social REITs. Furthermore, the Kenyan government has put in place measures to attract investors to the REITs market. For example, in June 2021, Amb. Ukur Yatani, Cabinet Secretary, National Treasury & Planning Ministry, announced the repeal of Value Added Tax (VAT) on asset transfers into Real Estate Investment Trusts (REITS).
Tanzania, surprisingly, is the only other East African country that has made significant progress in incorporating REITs into its real estate market. However, the Watumishi Housing Company Real Estate Investment Fund (WHC-REIT), which operates as a mutual fund, is the only one in the country. The primary goal of the WHC-REIT is to generate funds for the development of low-middle income housing in order to meet the housing needs of civil servants. While the REIT will develop commercial properties, its primary focus will be on developing affordable housing for sale and rent, with a target house price of $10,000 to $40,000 USD.
The REIT was expected to grow to TZS 358 billion (US$ 164.7 million) by 2020, with stakeholders including The Public Service Pension Fund, Government Employees Provident Fund, PPF Pension Fund, LAPF Pension Fund, National Security Authority, National Health Insurance Fund, and National Housing Corporation. As a result, WHC-REIT is in charge of constructing 50,000 housing units across five development phases. The first phase, which began in December 2015, includes 1,500 housing units distributed across 11 regions. As the primary implementer of the Tanzania Public Service Housing Scheme, the houses built will be sold to public employees on a mortgage basis. This scheme aims to address public employees’ low mortgage adoption rates by arranging for workers to access mortgages at lower interest rates of 11-13 percent with longer-term bonds of up to 25 years.
While Uganda and Rwanda have passed legislation to encourage the incorporation of REITs into their property markets, no significant progress has been made.
Lack of proper structures and misinformation continue to impede on the growth of the REITs Market
Despite the many benefits of incorporating REITs into the real estate market, countries are yet to fully reap its rewards due to some major challenges. Using Kenya as a case study, here are a few of the challenges preventing the full adoption and development of REITs within the country:
- High Minimum Capital Requirements for a Trustee: In Kenya, the minimum capital requirement for a trustee is set at Kshs 100 million, which limits involvement to banking institutions as corporate trustees and other fund managers cannot afford it.
- High Minimum Investment Amount: To invest in a Development REIT (D-REIT) in Kenya, you will need at least Kshs 5 million to successfully do this. This investment amount effectively excludes the majority of Kenyans who earn a gross median income of Kshs 50,000, making it impossible for them to enjoy the many benefits of REITs.
- Inadequate Investor Knowledge: A major issue of REITs in Eastern Africa is the lack of awareness of prospective investors. Although REITs were implemented in Kenya in 2013, it’s not a well-known investment option among the populace. This lack of knowledge is considered a major contributor to the low subscription rates, the consequent poor performance of the FAHARI I-REIT, and the failed issuance of the Fusion D-REIT in 2016 by Cytonn.
- Economic Uncertainty: The COVID-19 pandemic affected major sectors worldwide, including the African real estate market. Thus, many investors are hesitant to invest. Although the market is beginning to experience renewed interest with recent development projects announced recently.
Still, REITs remain the next frontier of growth towards formalizing the regional real estate market
Despite the current underwhelming performance of REITs in East Africa, there are opportunities for growth in the market. For countries like Kenya with high minimum capital requirements and minimum investment amounts, a review of these figures should be carried out to enable a more inclusive scheme for prospective trustees and investors. In addition to this, work needs to be done on enlightening the public about REITs, by organizing conferences and workshops. Finally, in countries such as Uganda and Rwanda, the stage is set to leverage lessons learnt from Kenya’s experiences for the markets to take off.
