Kenyan investors will have a chance to buy shares of real estate companies from the securities exchange beginning next month, the capital markets regulator has said.
Regulations allowing introduction of Real Estate Investment Trusts (Reits) – which will allow investors to buy shares of real estate developers — are to be finalised by January.
Capital Markets Authority (CMA) chief executive Stella Kilonzo said the regulations guiding the operation of Reits will be completed by mid this month to allow time for public review before enactment next month.
The new law will set the framework for licensing of firms operating as Reits, which will be listed at the Nairobi Securities Exchange that recently changed its name to reflect an expanding product base beyond shares and bonds.
“We expect the draft framework to be ready by mid-December for public exposure and finalisation in the course of January,” said Ms Kilonzo in an interview.
The only Reits company currently operational in Kenya, Africa Reits Ltd, is unquoted. The firm raised funds two years ago through a private placement, which is not currently regulated by the CMA though there is a proposal to make notification to the regulator mandatory on such placements.
Africa Reits, which has already invested in several housing developments in Nairobi and Athi River, had equity valued at Sh1.2 billion.
The firm had 100,000 shares at the time of the issue, according to a document sent to potential investors. However, it was only selling 40 per cent of the shares at Sh30,000 each.
A manager in the finance department of Africa Reits, who identified herself only as Joyce, said that the company was able to raise the cash but declined to divulge further details, saying theirs was a “private company.”
Daniel Ojijo, executive chairman of Mentor Group that also owns real estate firm Villacare, said he expected to see a high take-up of Reits once the regulations are in place.
“Because of the good returns in real estate, I expect that there will be a lot of interest in Reits once floated. We expect that real estate will show capital gains of between 15 and 20 per cent this year, the same as last year,” said Mr Ojijo. He said the appreciation was justified because rental properties were fetching good returns with apartment houses in some Nairobi estates bringing an income of between Sh150,000 and Sh300,000 per month.
Tax incentives
Ms Kilonzo said that no company has as yet applied for a Reits offer. The Finance Act 2011/12 allows floating of securities under Reits and gives some tax incentives, but leaves it to CMA to formulate detailed guidelines on how they will work.
She said the proposal is for a dual regulatory framework that provides for the introduction of traditional rents-based Reits and the other for development or construction of houses.
Traditional Reits involve pooling funds for investment in stable income generating rental properties, particularly commercial leases with limited investment in development projects, which she said would be open to investment by the public given that income streams will be predictable much like a bond.
The other type is called development Reits, used to pool funding for construction of housing and other priority sector construction projects which would be permitted to invest in higher-risk development and construction activities.
“These (development Reits) will not be open to investment by the public given the significantly higher risks associated with construction, but upon completion of construction the properties would be eligible to be rolled into a traditional Reit once they establish a stable rental income flow,” said Ms Kilonzo.
Kerry Adby, a consultant who has been working with CMA on asset-backed securities (ABS) regulations, said in a presentation to a conference held recently in Nairobi that issuers should consider using Reits in combination with debt-creating instruments such as ABS.
She said that issuers can use Reits in combination with bonds such as mortgage-backed securities (ABS based on mortgages) that securitise housing loans thereby releasing more cash.
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