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Why real estate investment trusts are not adequately contributing to affordable housing

By Amrit Soar and Josphat Nthata

The ever increasing rural to urban migration has led to a proliferation of informal settlements with little or no social amenities such as water, drainage and sewerage systems. This situation has rendered article 43 of the Constitution which inter alia, entitles every person a right to accessible and adequate housing, and to reasonable standards of sanitation, nugatory.

Since 2017, there have been efforts by the government to develop and promote development of affordable housing projects across the country.

Despite real estate investment trusts (REIT) regulations having been promulgated over a decade ago, REITs are yet to gain traction to significantly contribute to development of affordable housing.

A REIT is a regulated investment vehicle that enables collective investment in real estate, where investors pool their funds and invest with the intention of earning profits or income.

The two main types of REITs in the Kenyan market are development REITs and income REITs. Development REITs acquire land and develop it while income REITs acquire and manage existing income-generating real estate.  

While REITs enjoy special tax treatment in Kenya compared to other investment vehicles, there are only a handful of real estate players who have dared to venture into this space. This tread with caution attitude is attributable to several factors.

First, while REITs enjoy tax benefits, the Kenyan tax regime is unpredictable with tax statutes being amended every year as part of the annual budget making process. The uncertain tax benefits result in a lack of motivation for a commercial decision to venture into REITs, especially considering other specific requirements applying to REITs.

Second, there is a marked lack of information and understanding on REITs. As a result, most investors go for the tried and tested options such as limited liability companies.

Third, a Kenyan REIT requires a promoter, a trustee and a manager. The trustee and the manager must meet certain criteria. For instance, a REIT trustee must have a minimum paid up capital and reserves of Kshs. 100 million while a REIT manager must have a paid up share capital  and reserves of at least Kshs.10 million. Given this, together with compliance with other legal requirements, there are few licensed REIT trustees and REIT managers in Kenya and the cost of hiring their services can be prohibitive for those who opt for a REIT as an investment vehicle.

Further, under Kenyan law, a development REIT should have a minimum of seven investors with at least 25 percent of the REIT being owned by people who are not related to the promoter (founder). Since Kenyans prefer to invest in real estate either alone, with family members or those they are familiar with, REITs are an unattractive option.

Minimum investment and asset value requirements are also a deterrent. For example, to be registered, a development REIT must have a net asset value of at least 100 million shillings while an income REIT must have a net asset value of at least 300 million shillings.  

Additionally, the fact that a REIT is a relatively new concept in Kenya could explain why many people are yet to embrace it as an investment vehicle. While Kenya has for decades had laws on companies and partnerships, REITs regulations, which are the main legal and regulatory framework for REITs, were only promulgated in 2013.

An average Kenyan would prefer direct ownership of real estate to other forms of investment. While a REIT caters for investment in real property, it does not provide a direct ownership of property to investors who are only entitled to units which are the equivalent of shares in a company.

Given that the affordable housing initiative is still in its initial stages in terms of units delivered, the government should consider bringing REITs stakeholders such as the REITs Association of Kenya onboard to play a role that complements government efforts to promote a better understanding of the REITs offering as an investment vehicle.

The government should also come up with predictable tax policies so that investors are confident of what tax benefits they stand to enjoy and for how long should they opt for a REIT as an investment.  

As a real estate investment vehicle, REITs can make an invaluable contribution in addressing the persistent affordable housing deficit in the country and this potential is yet to be fully tapped.

The article was featured in the Business Daily and can be accessed here.