What’s holding Reits back?

Kenya: The Capital Markets Authority (CMA) recently announced timelines for processing applications for issuing securities and allowing new players.

The regulator normally deals with applications for issuing corporate bonds, rights, licensing of real estate investment trusts (Reits) managers and intermediaries.

It is reported that the number of these applications has gone up as the market introduces new products.

Over the years, the common practice has been that the regulator remains quiet over the progress of approval for applications and only makes announcements on completion of the process.

The new move does not add much value except for promoting transparency. It would be interesting to know how many Reits managers have been registered. Very little is being heard about the progress of Reits since CMA officially gazetted the regulations about two years ago.

This is curious given the enthusiasm with which players waited for the rules to be gazetted. Drafting of the new laws started in 2009 and took about four years to conclude. By around mid last year, the regulator had licensed about four Reits managers, but not even a single promoter (investor). That brought about a situation where there were Reits managers without anything to manage.

The only encouraging news about Reits is the recent announcement by mortgage lender Housing Finance (HF) that it plans to tap into the Reits market for long-term funding through both development and income Reits.

 Licence

In July last year, the firm received a licence to operate as a Reits trustee from the Capital Markets Authority. HF is awaiting approval for a Reits manager for its subsidiary, Kenya Building Society.

It is hard to understand why Reits is taking so long to take root in a country that has boasted a vibrant real estate market for over a decade. And the regulator is not the problem.

Indeed, soon after gazetting Reits rules in 2013, CMA went ahead to reduce the lock-in period for Reits promoters to two years, allowing them to exit projects earlier than three years as originally proposed. The regulatory body also issued a legal notice stating that promoters would be required to hold 20 per cent of the asset value listed at the exchange before being allowed to cut it to ten per cent by end of the second year and ultimately exiting.

It had initially been proposed that the promoter should hold 30 per cent of the assets, which would drop to 20 per cent, then ten per cent before a final exit. Potential promoters enthusiastically welcomed the changes, saying they make it easier for them to exit from a project faster and move on to new projects.

 

But where are the projects? It has been argued that part of the problem is lack of mega real estate projects that can be listed on the Nairobi Securities Exchange under Reits.

Others have also argued that despite the steady growth in the real estate market, efforts to structure and regulate it as an investment have proved challenging. There have also been concerns about how to tax income from Reits investments.

Reits is a promising idea, especially for individual investors who will buy a real estate project’s shares on the bourse, and we should not underutlise it.

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