Opinion

By Lucas Mbugua | Nov. 14, 2024

 

The benefits of investing in real estate investment trusts (Reits) have emerged as a compelling investment vehicle for retail investors in Kenya.

Reits offer a range of benefits that make them an attractive option for those looking to diversify their portfolios and participate in the country’s growing real estate sector.

As the Reit market continues to evolve and attract more players, it is important for retail investors to understand the advantages of investing in these instruments. One of the primary benefits of Reits is the accessibility they provide to high-value real estate assets. Traditionally, investing in real estate required significant capital outlay, often placing such investments out of reach for the average retail investor.

Reits democratise real estate investment by allowing individuals to purchase shares in a portfolio of properties. This means that with a relatively small investment, retail investors can gain exposure to a diversified range of high-quality properties, including residential, commercial, and industrial real estate.

Reits inherently offer diversification, which is a critical component of a well-balanced investment portfolio. By pooling funds from numerous investors, Reits can invest in a variety of properties, thereby spreading risk. This diversification reduces the impact of any single property’s underperformance on the overall portfolio.

The geographical and sectoral spread of Reit investments mitigates risks associated with localised economic downturns or sector-specific challenges. One of the standout features of Reits is their ability to provide steady income streams. They are mandated to distribute a significant portion of their rental income as dividends to shareholders. For retail investors, this translates into regular income, making Reits an attractive option for those seeking consistent cash flow.

Investing in Reits offers the advantage of professional management. The instruments are managed by experienced real estate professionals who are adept at property acquisition, management, and disposal, ensuring optimal performance of the portfolio. This professional management is particularly beneficial for retail investors who may lack the expertise or time to manage real estate investments themselves.

Compared to direct real estate investments, Reits offer greater liquidity. Shares of publicly traded Reits can be bought and sold on stock exchanges, providing investors with the flexibility to enter or exit their positions relatively easily. This liquidity is a significant advantage, especially in times of financial need or when rebalancing one’s investment portfolio.

The tiered performance fee structure of many Reits aligns the interests of the managers with those of the investors. The manager’s share of returns increases with the performance of the investment, incentivising them to maximise returns for investors. This alignment ensures that the Reit managers are motivated to perform at their best, ultimately benefiting the retail investors.

Reits in Kenya are regulated by the Capital Markets Authority, which ensures that they adhere to strict guidelines and reporting standards. This regulatory oversight provides an added layer of security for investors, ensuring transparency and reducing the risk of fraud. Investors can have confidence that their investments are being managed in accordance with established regulatory frameworks.

In addition, Reits enjoy various tax advantages in Kenya. They are exempt from income tax, value-added tax and stamp duty, making them an attractive investment option for retail investors.

Reits offer retail investors in Kenya a unique opportunity to participate in the lucrative real estate market without the need for substantial capital or extensive expertise. The benefits of accessibility, diversification, steady income, professional management, liquidity, alignment of interests, regulatory oversight, transparency and tax benefits make Reits a compelling investment vehicle.

As the Reit market continues to evolve and attract more players, retail investors have an excellent opportunity to capitalise on the potential of Kenya’s growing real estate sector.

The writer is head of corporate finance at Mi Vida Homes