Are REITs a Good Investment? Investing in REITs in Kenya (2024)

Real Estate Investment Trusts allow investors to reap real estate benefits without a huge initial capital outlay. Understanding the Pros and Cons

• Real Estate Investment Trusts (REITs) allow investors to reap real estate benefits without a huge initial capital outlay.
• REITs are regulated by the Capital Markets Authority and the Retirement Benefits Authority, making them a safe investment option.
• The return on investment on REITs ranges between eight and 12% per annum. This return investment becomes substantial, considering it is compounded over the investment period.

Like many other investment channels, REITs have advantages and disadvantages. And being a fairly unknown form of investment, a lot needs to be unpacked. So, what exactly are REITs and are they a worthwhile investment opportunity?

Known as Real Estate Investment Trusts, REITs is an investment vehicle used by real estate companies to raise capital for real estate development.

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The Ins and Outs of REITs

REITs are similar to bonds, except funds are geared toward real estate development. Being an investment tool, they are regulated by the Capital Markets Authority (CMA).

They require four parties;

1. Promoter who represents the issuer of the REIT.
2. REIT manager, usually a company incorporated in Kenya and licensed by the CMA to offer fund management services.
3. A trustee who acts on behalf of the investor and a project manager, in charge of delivery the planning and delivery of the real estate development.
4. Project/Property Manager in charge of overseeing the construction of the development projects.

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Currently, there are three main types of REITs in the market;

1. Income Real Estate Investment Trust (I-REIT); funds raised are used to acquire income-generating properties.
2. Development Real Estate Investment Trusts (D-REITs) and funds raised are used to acquire land and develop a real estate project. They convert to I-REITs once the development is completed.
3. Islamic Real Estate Investment Trusts aim to allow investors who seek shariah compliant investments to invest in REITs.

The current REITs issuers, according to CMA, are ILAM (a subsidiary of ICEA Lion) and Acorn Holdings Limited.

How to Invest in REITs in Kenya

There are several ways to buy REITs in Kenya;

1. Through Nairobi Stock Exchange just like you would buy shares.
2. Through a local stock broker.
3. Through a mutual fund that specializes in REITs investment as part of their investment portfolio.

What Are the Pros and Cons of REITs?

REITs are a safe investment channel because they regulate and trade in the public domain. In this case, Nairobi Stock Exchange.

Additionally, you can trade your units and opt out of the investment, making them very liquid. Unless it is a closed-ended REIT, you must wait until the end of the investment period.

You can also invest in multiple REITs, thus diversifying your portfolio. The mobilization nature of the investment also enables investors to reap benefits from real estate investments without a huge initial capital outlay, as most investment projects require.

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But you also have to take into consideration the potential risks associated with REITs. Market unpredictability and potential tax hikes may affect their profitability. Some REITs sometimes need to raise more funds to launch due to limited investors and a lack of product knowledge.

Ultimately, the benefits largely outweigh the risks, and REITs are worth considering.

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