- INTRODUCTION
A Real Estate Investment trust (REIT) is a regulated investment vehicle that enables a person to contribute money’s worth as consideration for the acquisition of rights or interests in a trust that is divided into units to earn profits or income from real estate as beneficiaries of the trust.
In Kenya, REITS are governed by the Capital Markets Act, Cap 485A, Laws of Kenya (The “Act”) and its legislation the Capital Markets (Real Estate Investments Trusts) (Collective Investment Schemes) Regulations of 2013 (The “Regulations”)
The Act defines a real estate investment trust as an arrangement in respect of real estate or interest in real estate of any description, structured following the rules prescribed by the Capital Market Authority to enable a person to take part in the arrangement by either becoming an owner of the property or any part of it or to participate in or receive profits or income from the acquisition, holding, management or disposal of the real estate or the interest in the real estate or sums paid out of such profits of income.
A Real estate investment trust scheme shall be structured as an unincorporated common law trust which is divided into units and shall be established under a trust deed that sets out the matters under the First Schedule of the Regulations it shall have a trustee who is independent of the REIT manager and the promoter and shall satisfy all the requirements under the Regulations. The REIT manager and the trustee shall be licensed persons and must satisfy the requirements provided under the Regulations.
- TYPES OF REITS IN KENYA.
The following are the types of REITs listed under the Regulations;
- D-REIT– This is a development and construction real estate investment trust, the investors pool their capital together to acquire real estate with a view of undertaking development and construction projects;
- I-REIT- This is an income real estate investment trust in which investors pool their capital together to acquire long-term income-generating real estate (housing and/or commercial);
- Islamic REIT- this is a type of REIT that only undertakes Shari’ah-compliant activities. The regulations stipulate that compliance with Shari’ah law must be ensured.
- PARTIES IN A REIT.
- Trustee– this is party appointed under the trust deed as a trustee of the real estate investment trust and their main role is to act on behalf of the investors in the REIT, by assessing the feasibility of the investment proposal put forward by the REIT Manager and ensuring that assets of the scheme are invested per the Trust Deed. The Trustee shall be a company or a corporation incorporated in Kenya, independent of the Promoter, the REIT Manager and any Property Manager, Valuer, or Project Manager and shall be licensed by the Authority as a REIT trustee, be independently audited and have a minimum issued and paid up capital and non-distributable capital reserves of at least one hundred million shillings.
- REIT Manager- this is a company duly incorporated in Kenya and licensed by the Capital Markets Authority to provide real estate management and fund management services for a REIT scheme on behalf of investors. The REIT Manager shall be appointed by the Trustee with the prior approval of the Authority, it shall have a minimum paid-up capital of ten million Shillings, be independently audited, and have key personnel with experience and skills to manage the scheme and implement the objectives of the scheme and to enable it to undertake the role of and duties as REIT Manager.
- Promoter- this is a party that is nominated in the application of a real estate investment trust and is involved in setting up the real estate investment trust scheme.
- Project/Property Manager– this is a party whose role is to oversee the planning and delivery of the construction projects in the REITS.
4. LAW GOVERNING REITS.
In Kenya, REITS are governed by the Capital Markets Authority Act, Cap 485A, Laws of Kenya (the “Act”) and its subsidiary regulations, the Capital Markets (Real Estate Investment Trusts) Regulations, 2013 (The “Regulations”), providing a legal framework for their operation.
The Capital Markets Authority (the “Authority”) in Kenya is responsible for governing and regulating REITS, in line with the regulations that are designed to ensure transparency, accountability, and investor protection within the sector.
4.1 Authorization to issue a REIT.
Before the issuance of a REIT security in a real estate investment trust a person must apply to the Authority for and obtain authorization for the issue of the REIT security. The Promoter and the Trustee shall submit a joint application in the prescribed form to the Authority for authorization. The application must specify the scheme they seek authorization for either an I-REIT or a D-REIT.
The Authority may, upon considering the application and determining all factors, declare a real estate investment trust scheme to be an authorized scheme under the Regulations and issue an authorization certificate. The Authority also reserves the right to revoke the authorization due to various factors listed under the Regulation, it will however grant the trustee, the REIT manager, and any REIT securities holder an opportunity to be heard.
4.2 Liability of the Trustee, REIT Manager and Auditor
Despite any provision in the scheme documents, the trustee, REIT Manager, and/or Auditor shall be liable for any loss, damage, or depreciation in the market value of the securities or other assets in which the scheme assets are invested where such loss, damage or depreciation arises from;
- In the case of the Trustee or the REIT Manager, a breach of their fiduciary duties or obligations
- failure to exercise due care and diligence in the discharge of their functions;
- negligence whether professional or otherwise; or
- willful default by the trustee, secondary disposition trustee, REIT manager or
- auditor or their agents, employees, or associates.
The Trustee shall be liable to the holders of REIT securities as a fiduciary, and to the REIT manager for any loss suffered by them during its period as a Trustee or as a result of any failure by the Trustee to perform its obligations or the Trustee improper performance of its obligations.
4.3 Conduct of REIT Manager and Trustee
The Trustee and REIT Manager shall comply with the provisions of the Act and Regulation and failure to do so may constitute a ground for the revocation by the Authority of the license to operate as a Trustee or REIT Manager. The Trustee or REIT Manager shall not guarantee a REIT Securities holder that a specific result will be achieved arising from the advice which will be rendered or published, circulated, or distributed any advertisement that does not comply with the Act. Any information provided by a REIT manager or the trustee to REIT securities holders through reports, newsletters, and advertisements shall be factual and accurate.
5. KEY FEATURES OF REITS
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- Collective Investment: REITs pool funds from multiple investors, who contribute money’s worth as consideration for the acquisition of rights or interests in a trust. These contributions are then invested in income-generating real estate properties.
- Income and Dividends: REITs are structured to generate rental income and capital gains from their real estate assets. The majority of their net income must be distributed to investors as dividends, ensuring a steady income stream.
- Tax Benefits: REITs enjoy various tax advantages in Kenya. They are exempt from income tax, value-added tax, and stamp duty making them an attractive investment option. However, the gain accrued by an investor on the transfer of property into the REIT is subject to capital gains tax (CGT) at the newly adjusted rate of 15 percent from the initial rate of five percent.
6. BENEFITS OF INVESTING IN REITS
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- Liquidity: REITs are listed on the Nairobi Securities Exchange (NSE), providing investors with liquidity. This means that, unlike traditional real estate investments, you can buy and sell your REIT units easily on the stock exchange.
- Diversification: REITs typically invest in a wide range of properties and industries, offering investors diversification benefits.
- Consistent Income: REITs are mandated to distribute a significant portion of their net income as dividends, providing investors with a reliable income stream.
- Tax Efficiency: REITs enjoy tax exemptions, making them a tax-efficient investment vehicle.
7. CHALLENGES AND CONSIDERATIONS
While REITs offer numerous benefits, there are challenges and considerations to keep in mind.
- High Launch Costs: One of the prominent challenges that have deterred REIT growth in Kenya is the substantial upfront costs associated with their initiation. These costs encompass a wide range of expenses, including legal fees, administrative overheads, and marketing expenditures. The need to allocate substantial financial resources at the outset can be a significant deterrent for prospective REIT issuers. The substantial financial commitment required can dissuade potential market entrants, limiting the expansion of the REIT sector.
- Lengthy Registration Process: Establishing a REIT in Kenya entails a protracted and meticulous registration process. This process includes obtaining regulatory approvals, complying with a multitude of checks, and navigating through various legal formalities. The complexity and time-consuming nature of this process can lead to delays in launching REITs. Such delays not only hinder market participants’ enthusiasm but also have the potential to deter investors and entrepreneurs who are seeking more agile investment opportunities.
- Limited Market Awareness: Another challenge facing REITs in Kenya is the limited awareness within the market. The benefits of REITs, such as lower entry thresholds, liquidity, and tax advantages, need to be communicated effectively to investors. The lack of awareness and understanding regarding how REITs function may inhibit their growth potential. A concerted effort is required to educate and inform potential investors about the opportunities and advantages that REITs offer.
- Higher Investment Threshold: While REITs are known for their ability to offer a lower entry point for investors, the current provisions in Kenya present a significant challenge in this regard. To be categorized as a professional investor in a Development REIT or Restricted Income REIT, the minimum investment requirement stands at Sh5 million. This higher investment threshold restricts access to REITs for many potential investors who may not be able to commit such a substantial sum. It limits the inclusivity that REITs aim to provide and prevents a more extensive segment of the population from benefiting from these investment vehicles.
- Market Volatility: REITs are subject to real estate market cycles, which can result in market volatility due to economic changes, government regulations, or political activity.
- Dividend Restrictions: REITs are required to distribute most of their net income as dividends, limiting their ability to reinvest capital. This may impact the growth rate of the investment.
- Debt Financing: In some cases, debt financing may be used by REITs, leading to higher interest rates, which could affect returns.
- Real Estate Market Fluctuations: Changes in property values, occupancy rates, and rental income can affect the performance of REITs.
8. ADDRESSING THESE CHALLENGES
Overcoming these challenges requires a concerted effort from various stakeholders, including regulatory bodies, market participants, and industry associations. Simplifying the registration process, reducing associated costs, and increasing market awareness are crucial steps toward facilitating the growth of REITs in Kenya.
10. CONCLUSION
In conclusion, while Real Estate Investment Trusts in Kenya offer a promising investment avenue, it is essential to recognize and address the challenges that have thus far limited their proliferation. By streamlining the registration process, reducing launch costs, and enhancing market awareness, REITs can become a more accessible and attractive investment option for a broader range of investors. These steps will not only benefit investors but also contribute to the development and expansion of the real estate sector in Kenya.
- REFERENCES
https://thewealthtribe.com/investing-in-real-estate-investment-trust-schemes-reits-in-kenya/
https://rak.co.ke/legal-framework-governing-real-estate-investment-trusts-reits-in-kenya
https://kenyanwallstreet.com/the-best-reit-etfs-in-2022/
https://www.nse.co.ke/real-estate-investment-trusts/
The Capital Markets (Real Estate Investment Trusts) Regulations, 2013
https://saifproperties.com/understanding-reits-in-kenya/
https://landsofkenya.co.ke/news/what-are-the-best-examples-of-reits-in-kenya
https://rak.co.ke/exemption-of-vat-on-transfer-of-properties-into-reits
DISCLAIMER;
The article published above is for informational purposes only and does not constitute legal advice. While every effort is made to ensure the accuracy and reliability of the information provided, legal matters can be complex and may vary depending on individual circumstances or jurisdiction.
Legal issues often require personalized attention and analysis based on specific facts and legal principles. Therefore, it is strongly recommended that you consult with us regarding any legal questions or concerns you may have.
For personalized legal advice tailored to your circumstances, please schedule a consultation with us at info@cfngugi@cfngugiadvocates.com
