Ratio Magazine :: The Inside Track to East Africa’s Economies - Real Estate Investments Trusts: Sluggish Start in Kenya's Thriving Property Market

N.S.E Share Price

...NSE SHARE Index: 4264.66

UP by 3.08 points | Kakuzi Ord.5.00 77.00 -3.00

| Rea Vipingo Plantations Ltd Ord 5.00 16.45 0.00 | Sasini Ltd Ord 1.00 11.55 0.00 | AccessKenya Group Ltd Ord. 1.00 10.00 0.00 | Car & General (K) Ltd Ord 5.00 49.50 DNT | CMC Holdings Ltd Ord 0.50 10.40 -0.10 | Hutchings Biemer Ltd Ord 5.00 20.25 DNT | Kenya Airways Ltd Ord 5.00 39.50 0.00 | Marshalls (E.A.) Ltd Ord 5.00 14.20 DNT | Nation Media Group Ord. 2.50 173.00 -1.00 | Safaricom Ltd Ord 0.05 4.20 0.05 | Scangroup Ltd Ord 1.00 60.00 -0.50 | Standard Group Ltd Ord 5.00 39.50 DNT | TPS Eastern Africa (Serena) Ltd Ord 1.00 66.50 0.00 | Uchumi Supermarket Ltd Ord 5.00 14.50 DNT | Barclays Bank Ltd Ord 2.00 69.50 0.50 | Centum Investment Co Ltd Ord 0.50 22.25 0.25 | CFC Stanbic Holdings Ltd ord.5.00 79.00 0.00 | Diamond Trust Bank Kenya Ltd Ord 4.00 146.00 -1.00 | Equity Bank Ltd Ord 0.50 28.75 0.25 | Housing Finance Co Ltd Ord 5.00 28.00 0.75 | Jubilee Holdings Ltd Ord 5.00 187.00 1.00 | Kenya Commercial Bank Ltd Ord 1.00 23.25 0.25 | Kenya Re-Insurance Corporation Ltd Ord 2.50 10.60 -0.10 | National Bank of Kenya Ltd Ord 5.00 47.00 0.50 | NIC Bank Ltd 0rd 5.00 52.00 0.50 | Olympia Capital Holdings ltd Ord 5.00 5.00 0.05 | Pan Africa Insurance Holdings Ltd 0rd 5.00 76.00 -3.50 | Standard Chartered Bank Ltd Ord 5.00 275.00 3.00 | The Co-operative Bank of Kenya Ltd Ord 1.00 20.25 0.25 | Athi River Mining Ord 5.00 180.00 -1.00 | B.O.C Kenya Ltd Ord 5.00 150.00 DNT | Bamburi Cement Ltd Ord 5.00 197.00 0.00 | British American Tobacco Kenya Ltd Ord 10.00 280.00 6.00 | Carbacid Investments Ltd Ord 5.00 145.00 -1.00 | Crown Berger Ltd 0rd 5.00 32.50 -1.50 | E.A.Cables Ltd Ord 0.50 19.15 -0.40 | E.A.Portland Cement Ltd Ord 5.00 100.00 -3.00 | East African Breweries Ltd Ord 2.00 181.00 1.00 | Eveready East Africa Ltd Ord.1.00 2.55 0.00 | KenGen Ltd Ord. 2.50 15.50 -0.05 | KenolKobil Ltd Ord 0.05 9.40 -0.10 | Kenya Power & Lighting Co Ltd Ord 2.50 22.50 0.50 | Mumias Sugar Co. Ltd Ord 2.00 8.10 -0.30 | Sameer Africa Ltd Ord 5.00 6.15 -0.05 | Total Kenya Ltd Ord 5.00 28.00 0.25 | Unga Group Ltd Ord 5.00 10.35 -0.10 | City Trust Ltd Ord 5.00 186.00 DNT | Eaagads Ltd Ord 1.25 50.00 -4.50 | Express Ltd Ord 5.00 7.50 -0.20 | Williamson Tea Kenya Ltd Ord 5.00 200.00 0.00 | Kapchorua Tea Co. Ltd Ord Ord 5.00 125.00 DNT | Kenya Orchards Ltd Ord 5.00 3.00 DNT | Limuru Tea Co. Ltd Ord 20.00 305.00 DNT | Kakuzi Ord.5.00 77.00 -3.00 | Rea Vipingo Plantations Ltd Ord 5.00 16.45 0.00 | Sasini Ltd Ord 1.00 11.55 0.00 | AccessKenya Group Ltd Ord. 1.00 10.00 0.00 | Car & General (K) Ltd Ord 5.00 49.50 DNT | CMC Holdings Ltd Ord 0.50 10.40 -0.10 | Hutchings Biemer Ltd Ord 5.00 20.25 DNT | Kenya Airways Ltd Ord 5.00 39.50 0.00 | Marshalls (E.A.) Ltd Ord 5.00 14.20 DNT | Nation Media Group Ord. 2.50 173.00 -1.00 | Safaricom Ltd Ord 0.05 4.20 0.05 | Scangroup Ltd Ord 1.00 60.00 -0.50 | Standard Group Ltd Ord 5.00 39.50 DNT | TPS Eastern Africa (Serena) Ltd Ord 1.00 66.50 0.00 | Uchumi Supermarket Ltd Ord 5.00 14.50 DNT | Barclays Bank Ltd Ord 2.00 69.50 0.50 | Centum Investment Co Ltd Ord 0.50 22.25 0.25 | CFC Stanbic Holdings Ltd ord.5.00 79.00 0.00 | Diamond Trust Bank Kenya Ltd Ord 4.00 146.00 -1.00 | Equity Bank Ltd Ord 0.50 28.75 0.25 | Housing Finance Co Ltd Ord 5.00 28.00 0.75 | Jubilee Holdings Ltd Ord 5.00 187.00 1.00 | Kenya Commercial Bank Ltd Ord 1.00 23.25 0.25 | Kenya Re-Insurance Corporation Ltd Ord 2.50 10.60 -0.10 | National Bank of Kenya Ltd Ord 5.00 47.00 0.50 | NIC Bank Ltd 0rd 5.00 52.00 0.50 | Olympia Capital Holdings ltd Ord 5.00 5.00 0.05 | Pan Africa Insurance Holdings Ltd 0rd 5.00 76.00 -3.50 | Standard Chartered Bank Ltd Ord 5.00 275.00 3.00 | The Co-operative Bank of Kenya Ltd Ord 1.00 20.25 0.25 | Athi River Mining Ord 5.00 180.00 -1.00 | B.O.C Kenya Ltd Ord 5.00 150.00 DNT | Bamburi Cement Ltd Ord 5.00 197.00 0.00 | British American Tobacco Kenya Ltd Ord 10.00 280.00 6.00 | Carbacid Investments Ltd Ord 5.00 145.00 -1.00 | Crown Berger Ltd 0rd 5.00 32.50 -1.50 | E.A.Cables Ltd Ord 0.50 19.15 -0.40 | E.A.Portland Cement Ltd Ord 5.00 100.00 -3.00 | East African Breweries Ltd Ord 2.00 181.00 1.00 | Eveready East Africa Ltd Ord.1.00 2.55 0.00 | KenGen Ltd Ord. 2.50 15.50 -0.05 | KenolKobil Ltd Ord 0.05 9.40 -0.10 | Kenya Power & Lighting Co Ltd Ord 2.50 22.50 0.50 | Mumias Sugar Co. Ltd Ord 2.00 8.10 -0.30 | Sameer Africa Ltd Ord 5.00 6.15 -0.05 | Total Kenya Ltd Ord 5.00 28.00 0.25 | Unga Group Ltd Ord 5.00 10.35 -0.10 | City Trust Ltd Ord 5.00 186.00 DNT | Eaagads Ltd Ord 1.25 50.00 -4.50 | Express Ltd Ord 5.00 7.50 -0.20 | Williamson Tea Kenya Ltd Ord 5.00 200.00 0.00 | Kapchorua Tea Co. Ltd Ord Ord 5.00 125.00 DNT | Kenya Orchards Ltd Ord 5.00 3.00 DNT | Limuru Tea Co. Ltd Ord 20.00 305.00 DNT

Real Estate Investments Trusts: Sluggish Start in Kenya's Thriving Property Market

Saturday, 24 October 2009

Current tax structures make it inefficient for real estate investment companies to list on the NSE because rental incomes would be taxed as corporate income at 30%. Real estate investment trusts (REITs) were meant to address this, but the regulations enabling these vehicles are still incomplete. Rachel Keeler analyses the sluggish formalization of property investments in Kenya.

When the Capital Markets Authority (CMA) released draft regulations for real estate investment trusts (REITs) in April 2009, it promised to pry open one of Kenya’s most historically prized asset classes by providing tax efficiency, liquidity and risk reduction to real estate investors. Six months later, the regulations remain under extensive revision, with expectations for completion pushed past the end of the year. While the wait is indicative of Kenya’s underdeveloped capital markets, it also reveals a strange paradox here: Kenyans love investing in real estate; however, despite steady growth in the market, efforts to structure and regulate that investment have proved elusive.

Direct and Informal
Current tax structures make it inefficient for real estate investment companies to list on the Nairobi Stock Exchange (NSE) because rental incomes would be taxed as corporate income at 30%, translating into large losses for shareholders. REITs were meant to address this problem by providing a tax transparent vehicle whereby investors pool capital into a trust which is then used by a real estate management company to build a portfolio of properties. The trust is listed on the exchange and required to return 90% or more of its gains from property appreciation and rental income to shareholders, which allows it to avoid corporate taxes.

Without this option available in Kenya, most investment in real estate remains direct and informal. Individuals, informal investment clubs, and old Kenyan families often stockpile their wealth into a few properties that they develop and manage themselves. Some are turning to professional property managers like Knight Frank to guide the process, but others are happy to keep things quite private – especially as many have noted the Kenya Revenue Authority (KRA) does not keep tabs on this kind of property-related income. Pension funds in Kenya have also historically held direct real estate investments. Many of the oldest ones had all of their assets sunk into land and buildings. But Retirement Benefits Authority (RBA) regulations now cap direct property holdings for pension funds at 30%, leaving the funds less active in the sector than many would prefer.

Scaling to Fund
Some formal real estate development in East Africa has come through private equity funds. Actis is currently redeveloping Capital Properties in Tanzania. However, the emerging markets equity giant has recently moved the bulk of its business here into larger scale funds that does not deal in real estate. Managing Director of Knight Frank’s Africa business Peter Welborn says that is probably because real estate sold on the open market is hard for funds to develop on a large scale. For scale, better exit options are needed – like, for example, being able to float a property portfolio on the stock exchange.

That was part of the original plan for a USD350m sub-Saharan Africa real estate investment fund announced by Rutley Capital, Knight Frank’s London-based private equity investment arm, in 2007. Much of the money was to head for Kenya, where Knight Frank made a strong case regarding huge potential returns. Unfortunately the fund was set to launch at the same time the global economic crisis hit, and much of its capital dried up. But there were other problems the fund faced to operate in the Kenyan market:

“East African institutions needed a little more time to understand what was being proposed and to undertake their due diligence,” says Welborn. In 2007 the CMA, KRA and other regulatory bodies were years behind in their ability to regulate and support a fund of Rutley’s size and complexity. And in 2009, not much has changed. Kenyan asset managers complain that the CMA is always slow to catch up with market evolutions and opportunities. Welborn says despite this year’s release of the draft REITs regulations, Knight Frank’s regulatory outlook for the Kenyan market remains the same. Even so, the company is in talks with several hedge funds again about how to get more foreign capital invested in Africa’s lucrative real estate markets. Sovereign wealth funds from Asia are also quite keen to tap into Nairobi’s growth.

But on the ground in Kenya, development remains largely unstructured, locally driven, and somewhat hectic. It’s been a bumpy few years for local real estate fund managers Bora Capital since setting up in Nairobi in 2007. The plan was to enter the market with a KES700m private placement bang. But the placement was not successful, largely, Bora says, because private real estate funds are an unfamiliar concept in Kenya. Phelistus Nyaranga, client services officer at Bora, explains: “Kenyans have this mentality that if I invest in real estate, it has to be mine – I have to own it.” Real estate also presents unique challenges to fund managers: it’s a very hands-on business that requires experienced managers, costly valuations and long time horizons. The bureaucracy surrounding property development in Kenya is slow and often corrupt – Bora estimates a project that would normally return dividends within two years takes three once the red tape is factored in.

Bora has been slowly building its business, with interest from high net worth individuals who appreciate the privacy and structure that the fund provides. But Nyaranga says the company wants the chance to go public through a REIT. That would attract pension funds and retail investors who want to deal with a well regulated, quoted investment vehicle. “I see the biggest growth coming from the pension industry,” says Paul Mwai, CEO of African Alliance Asset Managers. Most industry experts agree on this point. Nyaranga, Mwai and others warn that getting individual investors used to the idea of indirect investment in real estate will take some time. But pension funds have been lobbying for the introduction of REITs as a way to diversify and expand their real estate portfolios beyond the 30% direct cap.

ICEA Asset Management commented in May 2009: “Given that diversification is a primary objective when managing pension portfolios, we strongly recommend the inclusion of property in every portfolio. Up till now it has been impossible for any but the largest fund to construct a diversified property portfolio because the only option has been to buy actual properties.”

Perspectives: Future Returns
The government sees REITs as a way to open the market up to new kinds of development like low income housing. Aggregation of investment would also help meet supply and demand in the market more efficiently. Nyaranga argues, “If you understand how real estate works, it makes more sense to trade it on the stock exchange.” Property in Kenya most always appreciates so REIT values should steadily rise, while offering the liquidity and diversification that investors should have but cannot get through direct holdings. Real estate is also most profitable when managed professionally, as would be required under REIT regulations.

The trick of course is to get the regulations right. The CMA is currently sifting through a very long list of comments and proposed amendments in response to the draft REITs regulations. Among the complaints: the draft is too theoretical, not user friendly, too vague on tax structures, too constraining on fund management, lacks clear distinctions on trust structures, fails to offer enough tax incentives, maintains unreasonably high capital requirements, fails to properly moderate valuation requirements, etc., etc. One of the largest problems is that the draft regulations don’t ensure that pension funds would retain their tax free status on gains made from REITs. This would make REITs investment unattractive to the funds that many see as the scheme’s main potential beneficiaries.

The CMA has said it is still working hard to iron these issues out. In the meantime, Kenya’s real estate industry will not suffer much. Capital will continue to flow in, not least through illicit channels like the Somali pirate trade. And strong demand will keep projects and profits up. The real loss from the CMA’s never-ending regulatory catch-up game is to foreign investors. Welborn stresses how keen they are invest in a fund like Rutley’s that could tap African real estate opportunities through Knight Frank’s extensive expertise on the ground. Construction costs and equity required to access good projects are both alluringly low here relative to the west. “The additional returns can’t be matched in first world countries,” Welborn says. “It’s slightly off the wall. You just can’t compare.”

Share this article with others:

Comments (3) Add Comment

Subscribe to this comment's feed

Mr
written by Stuart Hardman, October 24, 2009

A very good article, I agree that REITS are necessary to provide viable exit strategies to investors.

report abuse

vote down

vote up

Mr
written by Stuart Hardman, October 24, 2009

FDI into property on the African continent is far too low, African States need to work on simpliying their land policy/investment processes - even if only for commercial property.

report abuse

vote down

vote up

answer this topic
written by Cassie22Bowman, November 27, 2010

According to my analysis, thousands of people in the world receive the credit loans from various banks. Thus, there's a good possibility to get a commercial loan in every country.

report abuse

vote down

vote up

Write comment

Show/Hide comment form