Aug 14, 2016

Listed real estate investment stocks in Kenya have so far delivered a disastrous track record, subscriptions have been low and price performance post issuance has been significantly negative. Yet, real estate remains a very attractive sector driven by demand outstripping supply in the low to mid income segment.

1. The Stanlib Fahari I-REIT achieved only 29% subscription, and is now trading at Kshs 13.75, 31.25% below its issuance price of Kshs 20. Additionally, the REIT has recently applied for regulatory extension to meet reporting obligations
2. Home Afrika went public in 2013 at Kshs 12.0 per share and is now trading at Kshs 1.25, which is 89.6% below its issuance price, and,
3. The Fusion D-REIT offering has been extended twice indicating failure to raise required amounts. There is little clarity on its closure which was scheduled for 4th August.

A vibrant real estate capital market is essential in two key respects:

1. First, an enormous amount of funding is required for the reduction of the housing deficit. The traditional sources of real estate funding, such as bank debt and private equity, are not sufficient to meet the financing demands required by real estate. A vibrant real estate capital market is essential to addressing the housing deficit.
2. Secondly, is the need for real estate-backed investment returns; Listed real estate investments are crucial to diversifying and fortifying investment portfolios, especially long-term portfolios such as pension funds. Real estate is a good supplement to volatile stocks and lower yielding bonds. For individual investors, they get both the benefits of high and stable yields, but with prospects of long-term capital appreciation. The REIT Market Cap to GDP for Kenya compared to other countries shows significant opportunity for REITs, which is currently 0.06% of GDP in Kenya compared to 6.9% in South Africa, indicating room for growth for Real Estate listings in the capital market hence making real estate an investible security.

So, if there is money interested in real estate opportunities and there is real estate in need of money, why are we having difficulty gaining momentum in real estate listed investments and what can we do?

1. REITs are a new product and may require initially an industry initiative or a government sponsorship. Rather than each player trying to launch their own REIT, we should find a few strong real estate and investment players to collaborate on a club deal that has broad support with the goal of not just economic viability but also proofing the REIT concept to the market so that there is a success story. So far, all the real estate market listings (Home Africa, Fahari I-REIT and Fusion D-REITs) have not been successful, and this makes it extremely difficult for future offers. It is possible that the market for REITs could effectively have closed down for the foreseeable future,
2. Get broad institutional support before launching another real estate listing. In markets such as Japan, the main buyers of REIT stocks are financial institutions. We need to educate and bring on board the main institutional investors to commit to supporting the REIT before launching,
3. Bringing down the minimum amounts required for investments. The current amounts, for example, the minimum of Kshs. 5 million for the Fusion D-REIT is very high and locks out most investors,
4. Broad investor education in simple terms that investors can understand backed by demonstrable examples,
5. Providing some level of principal plus minimum return guarantees to the buyers to get them comfortable that issuers are convinced about their REIT,
6. Improved corporate governance around issuance. The first REIT offering is already asking for more time for regulatory compliance, and
7. REITs to be more selective in the assets they put in the portfolio so that they are compelling and can deliver clearly superior returns.

Kenya has always been at the forefront of technology and financial innovation in the region. The launching of REITs in the local markets was a good step. The REIT agenda has certainly suffered some significant challenges. It is time for the industry players in financial services, real estate and regulators to review the initiative and give it new impetus. Failure to rejuvenate the REIT market would be very negative to the market. 
 

Disclaimer: The views expressed in this publication, are those of the writers where particulars are not warranted- as the facts may change from time to time. This publication is meant for general information only, and is not a warranty, representation or solicitation for any product that may be on offer. Readers are thereby advised in all circumstances, to seek the advice of an independent financial advisor to advise them of the suitability of any financial product for their investment purposes.