Real Estate Investment Trusts, better known as REITs , are basically shares in Real Estate Assets,that trade on an exchange.I was particularly thrilled when the Minister of Finance, Hon. Uhuru Kenyatta, during this fiscal year’s budget speech, gave particular notice of the REITs by providing for tax concessions of their dividend income and capital gains.This is one area of Investment that i’ve paid close attention to mainly due to my interest in matters Real Estate and the revolutionary potential it portends to Kenyan Investors.
Well, REITs haven’t been fully operationalised as yet in Kenya.It was hoped for that by the start of this year the whole system would be fully in place, but apparently the Capital Market Authority is still in the process of fine tuning the Legal Framework that will govern its operation.I trust that under the stewardship of Stella Kilonzo, this idea will materialize before the end of the year.
The introduction of REITs, just like other forms of alternative investments, will no doubt provide a break from the traditional “brick and mortar” way of Real Estate investing.At the moment for one to lay claim on a piece of real estate, s/he must be ready to part with a handsome amount of money, if he is not inheriting.Investors will for once not be required to have large sums of capital outlay for them to participate in the Real Estate Pie.This is because the REITs will in effect break down Real Estate Assets into divisible shares of lets say kshs 100 per share, that will be traded on the NSE like other securities.The real estate assets will vary from actual developments to pool of mortgages.So one will be able to claim a part ownership on the various underlying Real Estate assets depending on the size of his/her ownership.
The REITs will ideally take three forms i.e. Equity REITs, Mortgage REITs or Hybrid REITs, presenting investors with a variety of options depending on their needs and preferences.Equity REITs invest in and own properties.Thus, their revenues come principally from their properties’ rents. Mortgage REITs deal in investment and ownership of property mortgages.Their revenues are generated primarily by the interest that they earn on the mortgage loans.Hybrid REITs on the other hand combine the investment strategies of equity REITs and mortgage REITs by investing in both properties and mortgages.
It has been argued in financial literature that the reason why its hard for Real Estate prices to stabilise is because its not possible to Sell Short Real Estate.This pitfall can be by-passed by REITs which essentially trade like any other security and thus can be sold short.The Dividend Reinvestment Plans (DRIPs), where the dividends earned are ploughed back to the investment and the tax advantages that accompany REITs make them even more appealing.
The operationalization of the REITs market coupled with the introduction of the Futures and Commodities markets, that is still in the pipeline, will give the much needed shot in the arm to our hitherto nascent Capital Markets.The benefits of a developed and efficient capital market in a country’s economy cannot be overemphasized.