A LOOK AT THE NEW OPPORTUNITIES IN KENYA’S COMMERCIAL REAL ESTATE:

The Kenyan economy has recently been on as remarkably steady climb in the past five years according to the latest Economic Survey Report released by the Government. While this growth has been a pleasant surprise it has been driven mainly by the remarkable growth in building and construction which registered as 6.3 % increase. In essence many people in Kenya are investing in real estate as a commercial enterprise rather than the traditional purchase of property for sentimental value. Commercial Real Estate is management and capital intensive and as commercial real estate picks up, the problem that faces a growing economy such as Kenya’s  is to enable large investors manage their investments while giving the wider population access to a slice of the pie. Real Estate Investment Trusts (REITS) are the answer in that by embracing REITS the economy will have restructured the flow of capital into commercial real estate.

A REIT is set up as a company that owns, manages and develops real properties with which it and its management have developed successful experience. The company typically focuses its ownership on a distinct type of property and geographical area and has as its principal source of income as rent.

A REIT is largely a tax vehicle designed to enable a corporation invest in real estate while reducing its corporate income taxes. In return, REITs are normally required to distribute 90% of their income, which may be taxable in the hands of the investors. The REIT structure was designed to provide a similar structure for investment in real estate as mutual funds provide for investment in stocks. Like other companies, REITs can be publicly or privately held. Public REITs may be listed on public stock exchanges like shares of common stock in other firms.
REITS invest in different kinds of real estate or real estate related assets, including shopping centers, office buildings, hotels, and mortgages secured by real estate.
There are basically three types of REITS:

• Equity REITS, the most common type of REIT, which invest in or own real estate and make money for investors from the rents they collect;
• Mortgage REITS which  lend money to owners and developers or invest in financial instruments secured by mortgages on real estate; and
• Hybrid REITS which are a combination of equity and mortgage REITS.

Many countries around the world have enacted legislation to regulate REITS because of their importance in harnessing capital for growth and development. For example REITS are to be introduced in Germany this year and some of the salient features of the German REIT law are:

• At least 75% of their assets have to be invested in real-estate.
• At least 75% of their gross revenues must be real-estate related.
• At least 90% of their taxable income has to be distributed to their shareholders through dividends.
• While the corporation is income-tax-exempt, the shareholders will have to pay individual income tax on the dividends.

REITS will help individual investors enjoy the benefits of owning an interest in the securitised real estate market. The best benefit being that of fast and easy liquidation of investments in the real estate market unlike the traditional way of disposing real estate.
The way forward would be for Parliament to enact legislation to provide for the establishment and regulation of REITS possibly through an amendment to the Income Tax Act. Much can be learnt from the legislation above. In this regard it is quite commendable to read about Rutley Capital Partners Ksh 13 billion property fund which is  a step forward in the right direction. Rutley is listed on the London Stock Exchange and may list in our Stock Exchange if the proper amendments to our laws are passed allowing for REITS.

For more information about this subject kindly contact:

Mr John Syekei Nyandieka, a partner in the Conveyancing Department of Muriu Mungai & Co on +254(020) 2746332. His email contacts are jonsyekei@wakili.com