When the Central Bank of Kenya (CBK) recently advised the real estate sector to start looking for alternative sources of funding as a way to prevent too much lending into the sector, it became apparent that the sector was going to face serious challenges. However, thanks to the recent introduction of the Real Estate Investment Trusts (REITs) in the country, the sector now has a new channel to raise capital through the Nairobi Securities Exchange (NSE).
Kenya has joined more than 30 countries worldwide that have embraced the REITs concept, which now boasts more than $1 trillion in market capitalization as at the end of 2013, up from $300 million in 2003.
The start of the new market which interestingly coincides with an ongoing real estate boom is set to help property developers access long term funds at cheaper rates, while providing retail investors with an opportunity to own landmark properties in the country, albeit a small stake. Supply is also expected to come from banks saddled with non-performing loans (NPLs) involving collateralized real estate. The latest data from the CBK shows that as at June 30, 2013, lending to the real estate sector by banks stood at Ksh194.9 billion ($2.3 billion) out of the Ksh1.45 trillion ($17 billion) in gross loans and advances made, an equivalent of 13%. The Kenyan government is also set to be an early participant as it seeks an alternative in its divestment of publicly-owned assets in order to finance its budget deficit.
As a pointer to its bright future, since the gazettement of the REITs regulations last year, two firms have been approved by the Capital Markets Authority (CMA) to operate as REIT managers. The National Social Security Fund (NSSF), one of the biggest property owners in the country, has also declared interest in the use of REITs to exit some of its real estate projects. Currently, the fund holds property estimated at Ksh33 billion ($388 million), which is 26% of its Ksh126 billion ($1.5 billion) worth of total assets. Overall demand from the wider pension industry is expected due to its preference for low risk and stable income investments. REIT stocks are known to give higher dividend yields and more stable returns than common stocks. Home Afrika, the only listed real estate developer, is also planning to raise up to Ksh2 billion ($23.5 million) through REITs to fund its infrastructure projects.
One of the challenges facing this fledgling market is the uncertainty over the direction of long term interest rates. A rise in rates would make REIT returns comparatively less attractive, and the market may face selling pressure as REITs borrowing costs rise. Existing and prospective managers will need to structure REITs that can offer attractive yields to investors. Nonetheless the stakeholders can take comfort in the fact that in the past 15 to 20 years, global returns in this sector have outperformed the broader markets. Three-year total returns ending 2012 stands at 38.6%. The lack of sophistication by local shareholders to trade securitized real estate is also another hurdle facing the market. However, though admitting that this could take a while to realize, history shows that REITs have eventually proven to be popular with investors who view stocks as too risky and bonds as not having enough yield.
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With the annual demand for housing in the country outstripping supply by as much as 150,000 units, REITs are set to bridge this gap by increasing availability of housing, which is a priority area in Kenya’s development program, Vision 2030, in addition to increasing availability of commercial and residential real estate.
Moreover, the new market will help deepen Kenya’s capital markets and provide a gateway to middle Africa for regional and international capital flows. Ernst and Young’s Global Perspectives: 2013 REIT report recognizes that the global REIT industry has been a major participant in transaction markets in the last three years. Real Capital Analytics (RCA) estimates that REITs accounted for 14% of transactions by volume in 2012, and that percentage rose to 20% in the first half of 2013. Needless to say, Kenyan REITS are on a safe path to success. With Kenya’s robust growth expected to be between 4 and 5% in the next few years, Kenya’s real estate sector is surely going to be an attractive option.
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