What makes Real Estate Investment Trusts unattractive to local investors

Home Afrika is the only listed vehicle with a substantial component in the portfolio of housing Reits. [iStockphoto]

Competing returns from debt securities issued by the government such as Treasury Bills (T-Bills) and bonds have been mentioned as some of the key reasons behind the sluggish demand for Real Estate Investment Trusts (Reits) in the country.

An analysis of the housing market in Africa where Kenya is featured shows there is competition for capital between Reits and the government.

It also shows that the returns from government T-Bills and bonds are usually so attractive that investors choose to put their money there.

The analysis was released last month by the Centre for Affordable Housing Finance in Africa (CAHF).

It is titled The Potential for Developing a Residential Real Estate Investment Trusts (Reits) Market in Africa with a focus on Morocco, Ghana, Nigeria, Kenya, Rwanda, Tanzania, Uganda and Zambia.

According to the analysis whose findings are largely based on how the market performed pre-Covid (2019), Home Afrika is mentioned as the only listed vehicle with a substantial component in the portfolio of housing Reits.

Fusion Capital is also cited as having attempted to raise capital for a D-Reit (Development Reit) with the offer being cancelled later, one of the reasons being a lack of investor appetite.

"Reits compete for capital with the government through the issuance of high yield T-Bill and bonds. To attract investors, Reits in Kenya would have to secure high rental yields that the local economies would not be able to support," the analysis reads.

It adds that alternative investment instruments such as bonds and Treasury Bills provide a higher return than rental yields.

"Rental yields are estimated at 6.5 per cent. Given the yields offered by government securities or terms deposits in banks, residential Reits would not be able to offer competitive yields," the document reads.

"For instance, the current gross residential yield is estimated at between six and nine per cent a year while the one-year T Bill coupon is around 10 per cent (as of October 2019)."

This lack of investor appetite, the analysis says, can be seen in the stock market for the listed Reits.

It gives an example of Stanlib's Fahari I-Reit (Income Reit) for 2019 where the market capitalisation as of October of that year was Sh13 billion while the share price had lost 9.21 per cent of its value the previous 52 weeks.

"Despite a loss of share value, the fundamentals of Fahari have been good with an annual dividend yield of 8.74 per cent and a net income margin of 53.61 per cent as of year-end 2018," the analysis notes.

"The lack of investor enthusiasm can be explained by the overall performance of the stock exchange and the effect of high yield of government securities."

On Home Afrika, the report notes that while it is structured as a company rather than a trust, the analysis reviewed it as a vehicle that raises funds from the capital markets for the sole purpose of investing in real estate in Kenya, which makes it be associated with a D-Reit.

Statutory reporting

It documents that the company's performance during the period under review was poor, according to the statutory reporting of financial information.

"As of October 9, 2019, the shares of the company were trading at Sh0.48 and had lost 40 per cent of their value in the previous 52 weeks. "As of December 31, 2018, it had made a loss of Sh225 million ($2.16 million) corresponding to a net income margin of -225.93 per cent."

The infiltration of South African-based Reits into the Kenyan market has also affected investor appetite.

"In the commercial and retail sector, it may be that the issue is a lack of local investor appetite, as several commercial investments have been recently purchased by South African-based Reits," the report says.

Further, the analysis notes the challenge with regulation, which requires Reit managers to sign leases of at least five years. "Unfortunately, this is impossible for residential Reits to meet. Most residential leases have a one-year tenure," it states.

"Furthermore, the tenancy laws favour the tenant, which creates potential high levels of non-performing tenancies" As a result of the above, the income stream for residential rental properties is not predictable, the growth of revenue streams is limited (low escalation) and the tenure of leases rarely exceeds one year.

"It is understood this requirement is currently under review and proposals to change the lease period will be forthcoming."

The other challenge for housing Reits is the lack of large pools of rental properties that can be acquired. "Developers are simply not delivering housing at scale," the report says.

This, it notes, is due to well-documented issues to do with affordability, availability of long-term financing and cost of financing for development and mortgages.

It notes that privately held or listed D-Reits could be part of the solution to increasing the supply of housing both for sale or rent to low or middle-income households.

"This would be an alternative to the existing developers who concentrate on the higher value end of the market.

"Since Fusion Capital failed to progress in 2016, there have been no significant attempts to capitalise a D-Reit."

This latest analysis is a follow-up from a previous one done in 2017 on residential Reits where developments in South Africa, Kenya, Ghana, Tanzania and Nigeria were reviewed. The 2017 report identified two significant disadvantages perceived for investment in lower-value residential properties.

"First, operating costs were mainly fixed so they took a large proportion of available rental, and lower-income households were more at risk of default," it said.

"Second, the extension of Reits to "affordable" households would require a new financial model, probably supported by government, to make such investment attractive."