Lessons from Kenya’s first Reit offer

On Wednesday, the sale of Kenya’s debut Income Real Estate Investment Trust (I-Reit) ended, paving the way for listing on the Nairobi Securities Exchange (NSE). The sale of Stanlib Investments Fahari Income-Reit’s shares to the public had to be extended by one week after the firm asked for more time to deal with investor queries.

In a statement last week, Stanlib said pension managers and other institutional investors had asked for additional time to understand the new securities. The firm said being the first in the market meant they had to ensure investors understood how the new investment vehicle works.

“Kenyans in general have a ‘wait-and-see’ attitude towards many financial schemes,” said James Muratha, the regional director of Stanlib Investments. The firm hoped to raise about Sh12.5 billion through sale of shares to the public. Each investor could buy shares worth at least Sh20,000.

The money will be used to buy two commercial properties in Nairobi’s Industrial Area and a retail centre — Greenspan Mall — in Donholm. Investors are expected to gain from the income and capital appreciation of the portfolio of properties the fund is invested in.

Initial reluctance

But what lessons can we learn from the sale of the country’s first Reit? Muratha says they were not surprised by investors’ initial hesitation: “We had anticipated this. We had to name it ‘Stanlib’ just to make it more credible because we knew the perception out here.”

The Kenya Revenue Authority wrote a letter to Stanlib, clarifying that investors of Kenya’s first I-Reit would not pay taxes on their earnings.

“After KRA clarified the situation regarding tax, we have seen a spike in participation,” said Muratha speaking on Friday last week.

Earlier scheduled to close on November 10, the Capital Markets Authority (CMA) approved an application to extend the Initial Public Offer (IPO), a move seen as an indication that the I-Reit had received little interest from investors.

“The extension was sought to give investors more time to acquaint themselves with the new investment vehicle. This is a new thing in the Kenyan market and we have to give people more time to understand how it works, plus Kenyans love the last minute rush,” said Muratha, adding: “A bit more is needed to be done on the information front. Some have caught on faster than others. Our IPO is not like Safaricom’s, since Safaricom was already a known entity. We only had three weeks to educate the public.”

According to Eric Musau, an investment analyst with Standard Investment Bank, the I-Reit received considerable coverage, a factor that helped push the IPO. “For new products in the market, a lot of publicity is needed for people to get correct information. I can say they (Stanlib) have done considerably well on the information front,” he said.

Not all felt the same. By Monday morning, some potential investors were scrambling to get the right information. Henry Olale, a freelance business executive in the Central Business District, had called his broker to seek more information.

“I have tried to read the paid adverts in the newspapers and watched television adverts, but I am yet to fully understand how Reit works. I feel the information has not been well disseminated to reach even the guy on the street,” he said.

But Stanlib is confident of what the future holds for Reits. “This is a game changer,” said Muratha, “...and it will determine how subsequent Reits will be perceived in this country.”

NSE CEO Geoffrey Odundo agreed, emphasising the importance of Reits in enabling more Kenyans afford real estate investments.

“The launch of Reits further enhances financial inclusion in our capital markets as average investors will now be able to invest in large-scale commercial, residential and industrial properties without requiring large sums of money,” said Odundo, during the launch of the Reits segment in the market.

Insiders

The skepticism was not restricted to potential investors. Key real estate insiders were also skeptical about the viability of the Fahari I-Reit, waiting to see how it fares on the securities market.

Reginald Okumu, a director at Ark Consultants Limited, a Nairobi-based real estate firm, cast aspersions on the viability of the Reits in a write-up that analysed the new investment vehicle based on the property management team that will drive the properties bought, a comparison between the I-Reit yield with yields from alternative investments in the securities market and a forecast on rental income.

He further analysed the underlying real estate assets and the lack of portfolio diversification as a way to mitigate unsystematic risk. In his assessment, lessons from struggling listing of real estate entities Home Afrika and Anglo African Property Holdings Limited have not been learnt.

“Reit provides investors at low-cost exposure, to the real estate market. Given its unique nature, investors require special tools to analyse an opportunity presented to help them make an informed decision,” he wrote.

Investors

But Muthara said the IPO was open to qualified institutional investors from East Africa, retail investors and foreign investors. “Most foreign investors jumped onto the IPO very quickly because they have experience with Reits from their own countries or other countries they invest in,” he said. “For institutional and retail investors, we have noticed the interest was across the board, although the interest is more from the former for obvious reasons.”

But Okumu argued that given the performance of office real estate sub-market, the state and location of the properties, it is doubtful that the I- Reit will achieve targeted yields.

However, Muthara said such criticisms show a clear lack of knowledge of the Reits market: “The properties earmarked for acquisition have undergone financial, civil, engineering and legal due diligence. They have passed the minimum requirement from the relevant authorities and questioning the I-Reit is questioning the mandate of these authorities. They all cannot be so complacent as to approve the acquisition.”

He said the Reit had the backing of the Capital Markets Authority, Kenya Revenue Authority, Nairobi Securities Exchange and the Treasury.