Real estate scheme fails to stir market nine years later

Wednesday, April 13th, 2022 04:00 | By
A gated community. PHOTO/Courtesy

Attempts to make the Real Estate Investment Trusts (Reits) debt market of choice for Kenyans has been dealt a major blow with investors remaining unenthusiastic since the concept was launched nine years ago.

Kenya is among African countries that have established Reits as an alternative means for financing real estate projects in 2013, with Nairobi Securities Exchange (NSE) listed Ilam Fahari I-Reit, pioneering the concept.

Reits are regulated collective investment schemes where their managers source for funds to build or acquire real estate assets, which they sell or rent to generate income. The income is then distributed to the investors.

Considered a response by the regulators to help small and individual investors own pieces of the lucrative property market, half-hearted demand seems to dent the country’s hopes in positioning the financing model as the debt market’s benchmark of choice.

Investment portfolios

“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,” investment firm Cytonn acknowledged in its weekly sector report.

Capital Markets Authority CEO Wyckliffe Shamiah said REITS give investors an opportunity to diversify their investment portfolios, adding that such investment trusts are regulated products making them safe bids for protection to investors.

“We encourage issuers and investors to consider REITS which is a regulated product with safeguards to protect investors,” he said in a past interview.

There have been calls to change tack to spur growth in the sector, but inflated land prices and high cost of construction materials are choking the concept’s endurance, despite being hyped as an investment vehicle for the lower segment of the society.

In countries such as South Africa 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.

Data from the sector shows that top mortgage providers in Kenya such as Absa Kenya, Co-operative Bank of Kenya and Consolidated Bank are among lenders charging the highest interest rates at 14.4 per cent, 14.9 per cent and 15.1 per cent respectively. This is against the 10.9 per cent in interest that was charged for a mortgage size of Sh 8.6 million as of December last year, according to estimates by 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.

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

Approval processes

“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 sensitised in an aim to improve investor knowledge,” Cytonn recommends.

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.

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