Investment Vehicles that Reap Big from Kenyan Real Estate

Imagine collecting a cheque at the end of the year, almost equal to half of the amount of money you have spent on rent for the year - a money back guarantee of sorts.

Sounds interesting doesn’t it? The good news is that this is actually set to happen soon in Kenya - with a tentative start date of the first quarter of 2013.

A new investment product will be launched at the Nairobi Securities Exchange, likely before the end of this year, which is structured to enable individuals to own shares in huge property companies in a structure known as Real Estate Investment Trusts (Reits).

A regulatory framework which has been developed by the Capital Markets Authority - the government entity tasked with the management of publicly listed investments, will guide the formation and operation of Reits.

Experts involved in the formulation of the regulatory laws explained that a Reits sponsor, usually a super investor such as a pension scheme or fund manager, would register the housing scheme it owns at the securities exchange before selling shares to interested individuals.

Property

To put a perspective to the operation of the proposed property trust, take the fictional example of Modise Property Group - a multi-billion housing firm that is seeking to list its residential estate consisting of 1000 three-bedroom rental apartments in Pangani, one of Nairobi’s middle class neighbourhoods.

Beginning January 2013, MPG expects an approval to list its estate to be granted by the CMA allowing it to list the entire housing estate on the securities exchange in the form of tradeable shares.

Investment Reits, or simply I-Reits, are exclusively structured to pool funds for the acquisition of finished properties that are either already generating rental income or are ready for tenancy.

An independent valuation of the housing estate shows that the 1000 family homes are worth Sh6 billion, with each unit attracting Sh40,000 per month as rental income for Modise Trust – the entity that MPG plans to transfer the property to prior to listing.

The transaction advisors drawing up the listing prospectus are expected to structure the deal such that the entire worth of the estate is divided into one billion shares, meaning each share in MPG will be sold at Sh6.

In a similar fashion as the listing of shares of any of the 60 companies whose stock is trading at the NSE, Martin Nduta - a tenant in the estate, has decided to invest the Sh3 million he has been saving to acquire a plot in Juja and build a home in future with the money generated.

Shares

Nduta’s savings are enough to buy 500,000 shares in Modise Trust, meaning that while he does not have a direct claim to any of the 1000 houses; his ownership comes from proceeds from the bigger estate.

The annual income for Modise Trust from the housing estate is Sh480 million, assuming management costs such as security, maintenance and utilities are paid for separately.

Paul Muthaura, the chief executive of the CMA, said the regulations of the I-Reits require directors of Modise Trust to declare at least 80 per cent of the total income from rent per annum as dividends, meaning that Nduta and his co-shareholders will jointly share at least Sh384 million.

“Investment Reits will pay out at least 80 per cent of the income as dividends, but there is, however, no prescribed upper limit,” said Muthaura.

Dividend payout

In the best case scenario of a 100 per cent dividend payout, Nduta would receive a cheque of Sh240,000 from his 500,000 shares at the end of the year, enough to cover half of his annual rental expense.

An alternative way to look at Nduta’s finances is that his monthly rent has dropped by half, while he still owns shares in Modise Trust which, given the recent trends in Kenya’s real estate landscape, could be appreciating in value by more than 20 per cent yearly.

With this scenario, after four years, Nduta’s shares in Modise Trust could be worth about Sh6 million, indicating a 100 per cent capital gains for a Reits investor.

But just like any other investment, taxes would apply for the dividends received by Reits investors, a situation that could alter the math for investors.

Business Daily Africa