Real Estate Investment Trusts (REITS) Frequently Asked Questions
Property as an asset class is highly sought after by astute investors. This is particularly so when it has the liquidity features of a listed instrument as is the case with REITS. At the same time, REITS could well be the solution real estate developers require to actualize their corporate objectives of setting up more developments.
In this write-up, we at Mboya Wangong’u & Waiyaki Advocates, who have been actively involved in legal REITS legal advisory work, seek to respond to Frequently Asked Questions about REITS.
1. What is a REIT?
A Real Estate Investment Trust (REIT) is a structure through which investors pool resources to invest in real estate securities which securities often (but not always) trade on securities exchanges. A REIT’s income is typically derived from renting, leasing or selling real estate and is distributed periodically to the securities holders.
REITS typically enjoy tax advantages.
2. Are there different types of REITS?
Under Kenyan Law there are two main types or REITS namely Development & Construction REITs (“D-REITs”) and Income REITS (“I-REITs”). D-REITs invest in property development and construction and derive a majority of their revenues from the sale of developed properties while I-REITs make long-term investments in income generating real estate and derive a majority of their revenues from rental income.
There are also Islamic REITS, which are sharia compliant forms of the D-REITS and I-REITS described above.
3. Are there any local REITS?
Currently there is only one REIT listed in Kenya, the Stanlib Fahari I-REIT, listed at the NSE in November 2015. We do not currently have a D-REIT. The market is poised for growth.
4. How can I participate in a REIT?
There are several key players in a REIT. Other than being an investor and security holder, professionals have a variety of roles they can take up in REITs including taking part as Promoters, Trustees, REIT Managers, Structural Engineers (in I-REITs), Transaction Advisors, Compliance officers, Valuers, Auditors, Property Managers, Project Manager Certifiers and Note Registrars.
5. What are the benefits of investing in REITS?
REITs provide easier access to property investment especially for investors who lack the capital base to invest alone in high cost real estate projects. Further, they improve liquidity in real estate investments through a readily tradable financial instrument. Investing in REITS allows for a diversification of investments across a range of property assets. Overall REITS provide a regular and stable income stream for security holders. Notably, there are several tax benefits and exemptions that apply to income derived from REITs.
6. Who can invest in a REIT?
Any person can invest in securities of an unrestricted I-REIT. However, only professional investors can invest in a restricted I-REIT or a D-REIT. Professional investors include: • any person licensed under the Capital Markets Act; • an authorized scheme or collective investment scheme; • a bank or subsidiary of a bank, insurance company, cooperative, statutory fund, pension or retirement fund; or a person including a company, partnership, association or a trustee on behalf of a trust which, either alone, or with any associates on a joint account subscribes for REIT securities with an issue price equal to at least five million shillings.
7. Are there any tax incentives for REITs transactions?
Yes. There are exemptions from income tax provided the REITs distribute 80% of their net income. There is exemption from stamp duty on initial transfer of property into a listed REITs scheme. Trading in listing securities is exempt from stamp duty.
8. How can a REIT scheme be terminated?
• By revocation of authorization by CMA;
• Through expiry of the term of the trust;
• Through termination upon application by the Trustee to CMA;
• Trustee, REIT Manager or any REIT securities holder may apply to Court for an order to wind up the operations of the authorized REIT scheme.
9. Why should I have REITs in my portfolio?
Adding REITs to your portfolio provides diversification. REITs offer a reliable and predictable income source.
10. Can I utilize a REIT to raise development capital?
Yes. Property developers are able to raise funds at the capital markets by selling REIT units to investors.
11. Are REITs regulated?
Yes. REITs are closely regulated by the CMA. They are managed by skilled, experienced and regulated managers. Besides, the property portfolio is also managed by a professional property manager. Interests of REIT Unitholders are looked after by the REIT Trustee.
12. Are dividends/distributions paid to investors taxed?
Yes. A 5% withholding tax on dividends is payable by local recipients of dividends, except, of course, where the recipient is itself tax exempt.
13. Does a REIT have to make a dividend pay-out?
Yes. I-REITS are required to distribute annually a minimum of 80% of the net after tax income from sources other than from realized capital gains on the disposal of real estate assets.
14. What are the limitations on investment amounts?
REIT securities offered as a restricted offer must be in minimum subscription/offer parcels of Kshs. 5,000,000. Further, a REIT must have a minimum of 7 investors.
D-REITS must have a minimum net asset value of KShs 100,000,000/= while I-REITS must have a minimum net asset value of KShs 300,000,000/=
15. Must all the REIT units issued and listed be publicly traded?
Yes, if listed, all the units should be listed. Further the law requires that at least 25% of the units be held by persons not associated with the Promoter.
16. Can a REIT invest its surplus funds in any other revenue-generating project?
Yes. However, an I-REIT must after its second anniversary, earn at least 70% of its income from rent, licence fees or access or usage rights or similar income generated by eligible investments in income producing real estate, and should have invested at least 75% of its total asset value in eligible real estate.
17. May a REIT borrow funds?
Yes. However, the trustee must ensure that any borrowing or provision of security is not prejudicial to the interests of the REIT unit holders. Besides, the total borrowings by a REIT or by any investee entity should not exceed, in aggregate, 35% and 60% of the total asset value with regard to I-REITS and D-REITS respectively.
18. Can I be a Promoter, even in my individual capacity?
Yes, the law allows for any person with initial cost coverage to set up a REIT for an intended purpose. It may, however, be better to incorporate a company for this purpose.
19. Do REITs only apply to Housing/Residential projects?
REITs are a flexible way to develop and create income or realize capital gain and they are not restricted to one type of real estate use. In other jurisdictions, such as the United States of America, it has applied to schools, hospitals, hotels and commercial properties like factories.
20. What benefit is there for me as a Promoter?
The value derived from the REIT may be two-fold. First, the Promoter can become an investor in the REIT by investing his land or asset into the REIT. Second, the Promoter may charge a fee for the role. The promoter may also take another role such as REIT Manager.
21. I have come across an opportunity to make more money in my project, can I convert my D-REIT into an I-REIT?
Yes, the law allows for conversion of a REIT from D-REIT to I-REIT.
22. Do I really have to list my REIT in the Securities Exchange?
It is not mandatory to list a REIT in the Securities Exchange, but an unrestricted I-REIT must be listed.