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How REITs help small investors earn from real estate

Reflex Eco Group – Kenya News

By Joshua Masinde (Local journalist)

This Blog is sponsored by http://www.reflexecogroup.com

 

Investing in real estate has become the vehicle of choice for many Kenyans.

And with the proposed introduction of the Real Estate Investment Trusts (REITs) on the stock market, low income earners will now have an opportunity to own shares in large property firms and reap dividends from the booming housing sector.

However, the cost of owning property in the country is set to remain high, locking most Kenyans out of home ownership as REITs do not address the issue of affordable access to home ownership.

The concept behind the REITs was to open up the lucrative real estate sector to the investing public and give it an opportunity to own shares in property companies, but not necessarily to lower the cost of home ownership.

According to Contrarian Investment analyst Mika Davis, REITs facilitate one to diversify their investment portfolio into the property industry through the Nairobi Securities Exchange (NSE).

“They (REITs) offer strong prospects of capital gains and high dividend income. Real estate prices have more than tripled in Kenya in the period between 2000 and 2010, outperforming other asset classes such as stocks and bonds,” Mr Davis argues.

TYPES

The different types of REITs that retail investors can take advantage of include equity REITs, mortgage REITs, and hybrid REITs. The equity REITs earn income for investors through collection of rent while mortgage REITs offer loans to property developers or investors through financial instruments secured by mortgages or real estate.

Hybrid REITs combine the investment strategies of equity REITs and mortgage REITs by investing in both properties and mortgages.

However, analysts say the REITs option is prone to several risks, including mismatch between the rising property prices relative to household incomes, which are growing at a snail’s speed. This could lock many people from purchasing property or accessing rental units in what could slow down investors’ earnings.

“Despite the surge in property prices, people’s personal incomes have not grown in tandem, therefore there is a strong possibility of a correction in property prices in Kenya as potential investors become priced out of the market,” Mr Davis notes.

MONITOR DEBT LEVEL

Investors are also expected to monitor the level of debt on a REITs books as this can result in low dividend pay-outs in case of a high interest market. The possibility of defaults by tenants and low occupancy rates in houses also pose a significant risk to this sector.

Analysts contend that this is a good idea for opening up the industry for further development through enhancing the liquidity of the otherwise illiquid property assets and also opening up the industry to retail investors seeking higher returns.

However, this does not offer an option of extending affordable home or property ownership to most of the people yearning to own homes.

According to a 2008 study by Vista Capital on the viability of the introduction of the REITs, this investment vehicle alone opens up the sector for additional financial instruments but falls short of enabling the average Kenyan to own property.

Although it provides an opportunity for the players in the sector to raise funds to finance huge property projects and earn shareholders dividends, it lacks the ability to make property ownership at the middle and low-end of the market less painful.

LIMITED ABILITY

“Retirement benefits schemes as well as many individuals are already investing in property, but many are limited in their ability to do so in that they cannot afford direct investments that are not liquid,” says the Vista Capital study.

Due to the illiquid nature of the property market because of the lengthy process involved in settling a transaction, it would be easier for investors to earn income by selling their REITs stocks, as is the case with share trading on the NSE.

“REITs will be trading on the NSE every day. You can wake up today and decide to sell your REIT shares, something you can’t do with an illiquid assets like a plot or a house,” Mr Davis says.

The entry requirements for one to own a REIT will be lower compared to the entry into the real estate sector through direct purchase of property or land.

For instance, for one to venture into real estate, say within the Nairobi metropolitan area, one needs at least Sh5 million or go for debt.

But through the REITs, an investor can own shares in properties in different parts of the country and also properties of different types like rental, commercial, or industrial.

REITs are expected to list on the exchange through an initial public offering (IPO) where investors buy units of the company. Property firms must pay 90 per cent of their income as dividend and invest in the real estate sector should they list on the NSE under the REITs.

With anticipated higher levels of participation of the property sector in the capital markets, both financing and property development could become more competitive, thereby aiding in reducing development costs that could also be passed on to those intending to own homes.

BIGGEST BENEFICIARIES

Sector players, however, say the biggest beneficiaries for this investment scheme are the large property developers and/or financiers of the funds.

They argue that the housing sector should be given additional incentives to help the government to meet one of the goals of its development blueprint, Vision 2030, to make affordable homes available to most Kenyans.

According to The Mortgage Company’s managing director, Ms Carol Kariuki, the REITs, apart from proving an additional investment option for retail investors, it will also provide liquidity in the market and offer developers tax incentives with no direct benefit to most of those who do not have access to affordable housing.

The idea to exempt real estate developers from corporate tax was one of the main objects in the development of the REIT regulation but only if 90 per cent of net income is given to shareholders.

“If this was to be passed on to most of the Kenyans who want to own property, then affordable housing would be a reality in Kenya,” Ms Kariuki said, noting that this could lessen the pain of the more than 92 per cent of Kenyans who cannot afford mortgages at the current interest rates.

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