by: Naomi Wangari & Patrick Nguri
Introduction
The right to accessible and affordable housing, being a social and economic right, can only be realized progressively. Like other social and economic rights under Article 43 of the constitution, it requires the State to act through legislation, policy, or initiatives for its progressive realization. As held by the Supreme Court of Kenya in Mitu-Bell, the right to housing is inherent to every individual or family by virtue of their citizenship, irrespective of the progressive realization of the right. Unlike the progressive realization of the right to housing, which depends on current government legislation, policies, and initiatives, Real Estate Investment Trusts (REITs) offer predictability due to the stringent regulatory requirements set by the Capital Markets Authority.
Although not a substitute for the constitutionally guaranteed right to housing, Real Estate Investment Trusts offer an opportunity to not only investors for income-generating real estate investments, but also developers by bridging the financial gap in their quest to provide affordable housing projects. REITs were established in the United States during the 1960s to provide a mechanism enabling small investors to participate in large-scale, income-generating real estate investments.
In Kenya, REITs provide an investment opportunity to earn profits or income from real estate as beneficiaries of a trust. This notwithstanding, REITs have not been properly embraced in Kenya, given the high minimum value of initial assets required in setting up the trust. Stakeholders in the real estate industry have however noted that REITs could potentially complement various projects in Kenya, including the buzzing affordable housing initiative, by closing the funding gap in Real Estate Investments.
Protective Measures to Safeguard Investors in REITs
The Capital Markets Authority has put in place stringent regulatory requirements aimed at guaranteeing investors of income distribution and confidence of security of their assets. These include pre-authorization requirements and obligations, licensing and supervisory controls for the REITs, trustees and REIT managers, and post-licensing controls such as strict borrowing and income distribution requirements for the REITs.
In terms of borrowing, for instance, Income Real Estate Investment Trusts (I-REITs) are typically limited to total borrowings not exceeding thirty-five percent of the total asset value. However, a trustee may temporarily increase this limit to a maximum of forty percent for a term not exceeding six months, but only with the approval of the REIT security holders.
Development and Construction Real Estate Investment Trusts (D-REITs) also protect investors by limiting borrowings entered by the trustee or investee to a sum not exceeding sixty percent of the total asset value. Similar to I-REITs, this ceiling may be temporarily stretched by way of approval of the REIT securities holders, up to a maximum of seventy-five percent of the total asset value, and for a term not exceeding six months.
Why REITs?
REITs have revolutionized the way individuals and institutional investors can access and invest in real estate markets, by providing a vehicle that allows investors to pool their capital to purchase, manage, and invest in real estate. They are established with the objective of earning profits or income through the portion of income generated from the trust. Accordingly, just like shareholders of a company, persons investing in a REIT are not burdened with the day-to-day running of the trust, as the assets of the trust are managed by a licensed REIT manager, appointed by the trustee with prior approval of the Capital Markets Authority.
REITs guarantee certain minimum returns for the REIT securities holders. Subject to a higher income being specified, trustees of an I-REIT are required to distribute a minimum of eighty percent of the net after tax income. In addition, I-REITs are required to earn at least seventy percent of their income from rent, license fees or access or usage rights or other income streams, within two years of authorization.
Distribution requirements of D-REITs on the other hand, are made in accordance with the scheme documents and upon the recommendation of the REIT manager. A lower income distribution is only allowable through approval by the REIT securities holders. This ensures that investors’ projected income is consistent and that any payments do not adversely affect the capacity to maintain and preserve the assets of the D-REIT.
Conclusion
Real Estate Investment Trusts exemplify the ability of financial innovation to reshape markets and generate new investment opportunities. Since its global legislative inception in 1960, the REIT structure has evolved and has been adopted globally. This framework has facilitated broader access to real estate investment, enabling greater participation in this sector. As Real Estate Investment Trusts evolve in response to shifting market dynamics and investor demands, they continue to serve as fundamental components of contemporary real estate investment. REITs provide liquidity, diversification, and access to a wide array of real estate assets, maintaining their pivotal role in the industry.