REITs fail to excite investors 9 years into existence

By Steve Umidha

Kenya’s pursuit for Real Estate Investment Trusts (REITS) to become debt market of choice, has been dealt a major blow, with investors reporting lukewarm market reception since the concept’s launch 9 years ago.

In 2013, Kenya became the third African country behind the likes of South Africa (SA) to establish REITs as an alternative means for financing real estate projects. NSE-listed Ilam Fahari I-Reit pioneered the concept.

But muted demand has dented the country’s hopes in positioning the financing model to become the debt market’s benchmark of choice, nearly a decade since its hyped takeoff.

“Despite the REITS being in existence for more than nine years, the instrument remains subdued due to various factors among them being lack of investor knowledge,” acknowledged investment firm Cytonn in its weekly sector report.

Inflated land prices and high cost of construction materials are also thought to be choking the concept’s endurance.

REITs are companies that own or finance income-producing real estate across a range of property sectors.

These real estate companies have to meet a number of requirements to qualify as REITs – with most REITs trading on major stock exchanges, and offer a number of benefits to investors.

In countries such as SA where the concept has thrived, statistics indicate that REITs have historically provided investors dividend-based income, competitive market performance, transparency, liquidity, inflation protection and portfolio diversification.

Cytonn believes that REITs as an alternative means for financing real estate projects, can help plug the existing housing deficit and reduce overreliance on the expensive debt financing for developments.

“There is potential for growth of the instrument if reforms are made to favour the needs of investors, if the approval processes are aligned with well-defined timelines, and, if the public is sensitized in an aim to improve investor knowledge,” Cytonn recommends.

Industry figures show that top mortgage providers in Kenya such as ABSA Kenya, Co-operative Bank of Kenya and Consolidated banks are among lenders charging the highest interest rates at 14.4 percent, 14.9 percent and 15.1 percent respectively.

This is against the 10.9 percent in interest that was charged for a mortgage size of Sh Sh 8.6 million as of December last year, according to estimates by the Central Bank of Kenya (CBK). For such a facility the repayment period is capped at 11.2 years.

Homeownership among Kenyans continues to be an elusive target for a country facing a housing shortage or annual deficit of 200,000 units on a growing economy and a rising population.

High initial transaction costs such as the initial deposit to access a mortgage, lack of credit risk information for those in the informal sector as well as high interest rates for mortgage loans are thought to be the reasons holding back the majority of Kenyans from owning a house.

Indeed, the value of outstanding mortgages in Kenya has been shrinking as a result of the factors mentioned above.

The value of outstanding mortgages in Kenya closed 2020 at Sh 232.7 billion, a 2.1 percent decline compared to the close of 2019. The number of mortgages in the market closed 2020 at 26,971, down 3.7 percent compared to 2019.

In an attempt to boost the sector’s growth, Treasury CS Ukur Yatani in his budget statement on Thursday offered to exempt subsidiaries of real estate investment trusts (Reits) from income tax.

Such a move was first mooted three years ago but the Kenya Revenue Authority (KRA) which will now be known as Kenya Revenue Services is yet to publish such guidelines that will make it a reality.

Tax exemptions are a welcome major incentive boost that would encourage property investors presently grappling with the effects of Covid-19 and the Russian-Ukraine war whose impacts have seen construction costs shoot by 40 percent since March.