What’s a REIT? (Real Estate Investment Trusts (REITS)
A REIT is a Real Estate company which owns, develops or manages different types of properties i.e Offices, Shopping Centres, Apartments e.t.c. REITS normally debut at the bourse via an IPO, where the Public are encouraged to buy units in the Company/REIT. For a company to qualify as a REIT it must pay 90% of its income as dividends and they should only invest in real estate. REITS are regulated by the Capital Markets Authority (CMA).
Broadly speaking, REITS are regulated investment vehicles that enable collective investment in real estate. Investors, both retail and corporate, are allowed to pool their funds under the umbrella of the REIT and then engage in real estate projects.
Types of REIT?
There are 3 different types of REITS?
- Equity REITS
Invests in or own properties and makes money for Investors by collecting rentals, so in short Equity REITS are like small landlords.
- Morgage REITS
Lend money to developers or invests in financial instruments secured by morgages or real estate
- Hybrid REITS
Do both of the above.
Opportunities of Investing in a REIT in Kenya
- There is serious accommodation shortage especially in the underserved middle and lower ends of the property market
- REITS enables one to diversify his portfolio into real estate considering real estate is beyond the reach of many retail investors at the NSE.
- REITS offer strong prospects of capital gains and high dividend income. Real estate prices have more than tripled in Kenya in the period between 2000-2010 outperforming other asset classes such as stocks and bonds.
- Prospects of strong economic growth in coming years which will further lift Kenyan property prices.
Risks associated with Investing in a REIT in Kenya
- Property Prices-despite the surge in property prices peoples personal incomes have not grown in tandem, therefore there is a strong possibility of a correction in property prices in Kenya as potential investors become priced out of the market.
- Borrowing risks-Potential investors must scrutinize the amount of debt on a REITS books as this can results in low dividend pay outs in case of a high interest environment
- Rental defaults and low occupancy rates
- Political stability