At a time when financing real estate projects was becoming a challenge, REITs were introduced as an alternative financing source to address the funding gap and create a more inclusive market. However, they suffer from low Real Estate Investment Trusts, commonly called REITs, are regulated collective investment vehicles which invest in Real Estate. In essence, REITs make it possible for the average person to serve as one of many investors in a real estate investment or development project.

Understanding the East Africa REITs Landscape
REITs are a fairly novel concept in Africa in terms of their low adoption rate across the board.

Only a handful of African countries have incorporated REITs as an investment scheme, with a few located within East Africa namely: Kenya, Tanzania, Uganda, and Rwanda.

Of the four countries mentioned, only Kenya has made significant headway (although still underdeveloped) in the incorporation of REITs into their real estate markets. Real Estate Investment Trusts (REITs) were launched in Kenya in 2015 with the aim of developing the property market in the country.

Under this structure, REITs were broken down into income REITs (I-REITs) and Development REITs (D-REITs). Some of the stipulated requirements include;

I-REITs are required by the law to pay off at least 80% of their income to unit holders in the form of dividends.
Minimum Capital Requirement for a Trustee was set at Kshs 100 million which essentially limits the eligible trustees to only banks.
The current minimum investment amount for a Development REIT is set at Kshs 5 million, which is considerably higher than the gross median income of Kshs 50,000 in Kenya.
Since their introduction, the Nairobi Securities Exchange has had several authorized Real Estate Investment Trusts in Kenya with the premiere REIT being the ILAM Fahari I-REIT. This closed-ended I-REIT has its units listed on the stock exchange. As a result, the market price of the Units is market driven and may not be equal to the Net Asset Value of the ILAM Fahari I-REIT. However, the I-REIT Scheme may undertake secondary offers if the need arises.

Of the Direct Property allocation, the I-REIT has permission to invest the following sectors:

Mixed-use developments
Retail and commercial developments
Industrial projects
Hospitality and residential properties
Specialized buildings such as student accommodation, schools, etc
Additionally, the market has evolved to accommodate alternative real estate asset class REITs such as the Acorn Student Accommodation Interest Real Estate Investment Trust (ACORN I-REIT) and Acorn Student Accommodation Development Real Estate Investment Trust (ACORN D-REIT)

This has created momentum for players in the Kenyan industry to work towards introducing new products such as Islamic REITs and Social REITs into the market. In addition, the government of Kenya has also implemented measures to attract investors to the REITs market. In June 2021 for example, the Cabinet Secretary, National Treasury & Planning Ministry, Amb. Ukur Yatani announced the reversal of Value Added Tax (VAT) on asset transfers into Real Estate Investment Trusts (REITS).

Interestingly, Tanzania is the only other East African country that has made notable headway with the incorporation of REITs into their real estate market. However, they have only one established in the country called the Watumishi Housing Company Real Estate Investment Fund (WHC-REIT), which operates in the form of a mutual fund. The primary aim of the WHC-REIT is to generate funds to develop low-middle income housing to meet the affordable housing demands for civil servants. While the REIT will also develop commercial properties, the focus will be on developing affordable housing for sale and rents with the target house price set between US$ 10,000 – US$ 40,000.

At the time of commencement, the REIT was expected to grow to TZS 358 billion (US$ 164.7 million) by 2020 with stakeholders including; The Public Service Pension Fund, Government Employees Provident Fund, PPF Pension Fund, LAPF Pension Fund, National Security Authority, National Health Insurance Fund, and the National Housing Corporation. As a result, WHC-REIT is responsible for building 50,000 housing units over five development phases. The first phase, which launched in December 2015, consists of 1,500 housing units spread across 11 regions within the country. As the main implementer of the Tanzania Public Service Housing Scheme, the houses developed will be sold to public servants under mortgage arrangements. This scheme aims to mitigate the low mortgage adoption rates by public servants by making arrangements with banks for workers to access mortgages at lower interest rates of 11-13 percent with longer-term bonds of up to 25 years.

On the other hand, while Uganda and Rwanda have implemented legislation to encourage the incorporation of REITs into their property markets, no real progress has been made yet.

Lack of proper structures and misinformation continue to impede on the growth of the REITs Market
Despite the many benefits attached to incorporating REITs into the real estate market, countries are yet to fully reap its rewards as a result of some major challenges. Using Kenya as a case study, here are a few of the challenges preventing the full adoption and development of REITs within the country:

High Minimum Capital Requirements for a Trustee: In Kenya, the minimum capital requirement for a trustee is set at Kshs 100 million, which limits involvement to banking institutions as corporate trustees and other fund managers cannot afford it.

High Minimum Investment Amount: To invest in a Development REIT (D-REIT) in Kenya, you will need at least Kshs 5 million to successfully do this. This investment amount effectively excludes the majority of Kenyans who earn a gross median income of Kshs 50,000, making it impossible for them to enjoy the many benefits of REITs.

Inadequate Investor Knowledge: A major issue of REITs in Eastern Africa is the lack of awareness of prospective investors. Although REITs were implemented in Kenya in 2013, it’s not a well-known investment option among the populace. This lack of knowledge is considered a major contributor to the low subscription rates and the consequent poor performance of the FAHARI I-REIT and the failed issuance of the Fusion D-REIT in 2016 by Cytonn.

Economic Uncertainty: The COVID-19 pandemic affected major sectors all over the world, including the African real estate market. Thus, many investors are hesitant to invest. Although the market is beginning to experience renewed interest with recent development projects announced recently.

Still, REITs remain the next frontier of growth towards formalizing the regional real estate market
Despite the current underwhelming performance of REITs in East Africa, there are opportunities for growth in the market. For countries like Kenya with high minimum capital requirements and high minimum investment amount, a review of these figures should be carried out to enable a more inclusive scheme for both prospective trustees and investors. In addition to this, work needs to be done on enlightening the public about REITs, by organizing conferences and workshops. Finally, in countries such as Uganda and Rwanda, the stage is set to leverage on lessons learnt from Kenya’s experiences for the markets to take off.