How you could own a piece of prime real estate

Mention the term real estate investor and what comes to mind is a well-heeled individual who can put millions of shillings into a building project with relative ease.

Because of its capital-intensive nature, real estate investment is for the rich.

The less materially-endowed Kenyan majority, just as happens in many other economies, have to join forces and pool resources if they want to invest in the property market.

Happily, that is about to change, thanks to a new investment window that seeks to allow real estate to be traded on the Nairobi Stock Exchange.

The Capital Markets Authority has drafted rules for a special investment vehicle known as Real Estate Investment Trusts (REITs) that will allow individual investors to buy and sell shares of properties listed on the bourse in much the same way people trade in stocks and shares of companies listed on the stock exchange.

Large investors will be allowed to raise money from the public through the capital market, making it possible to channel capital into the real estate sector in a more structured manner.

Hailed by property experts as revolutionary and innovative, the move is seen as the answer to the need for a savings and investment vehicle that will result in a liquid property market (investors can easily liquidate their investments by simply selling their shares at the stock exchange) that is widely accessible to the private investor.

“REITs are intended to open up investment in the usually capital-intensive large-scale commercial property sector to the general public.

They will, for the first time in Kenya, facilitate the ‘chopping up’ of real estate into small units for people to trade in them,” says Mr Reginald Okumu, a former chairman of the Institute of Surveyors of Kenya (ISK).

He adds that REITs will reduce the sector’s dependence on high levels of debt financing, which increases its sensitivity to interest rate changes and makes investment in property less transparent and more risky and costly than it ought to be.

To benefit most are the millions of smaller investors who cannot invest in real estate because of the huge capital outlay required or if they do, they tend to access property in higher risk ways such as buy-to-let investments or direct ownership, and therefore cannot diversify investments to reduce risk.

Large investors will be required to register a real estate investment trust under the Trustee Act with the Capital Markets Authority.

The trust will raise capital from the market and invest it in real estate projects — whether commercial or residential — on behalf of shareholders with the aim of providing returns to unit holders.

The returns will mainly be in the form of rental income or capital gains accrued from the real estate investment.

A real estate investment management company, incorporated under the Companies Act Cap 486 and registered with the Capital Markets Authority, will manage the real estate investment schemes acquired by the trust on behalf of the investors.

Properties acquired by the trust and managed by the company will be listed on the stock exchange where people wishing to invest in real estate will have the opportunity to buy shares and trade in them.

The company decides the kind of real estate investments to go for, based on the amount raised by subscribers for the trust.

REITs will typically invest in real estate or related assets. These can vary from shopping centres to office buildings, hotels, and mortgages secured by real estate.