Presents a discussion of REITs and how they function with reference to the Nairobi Securities Exchange

1. Investing in Real Estate

2. Introduction
• Real estate is considered real property that includes land and
anything permanently attached to it or built on it, whether
natural or man-made.
• Real estate remains a valuable part of any well-diversified
portfolio

3. Introduction
• What are the aspects of real estate that make it attractive
or unattractive relative to other asset classes?
• Its potential to offer absolute returns
• Its potential to hedge against unexpected inflation

4. Introduction
• Its potential to provide diversification against stocks and
bonds
• Its potential to provide steady cash inflows
• Its potential to provide income tax advantages

5. Introduction
• There are also aspects of real estate that can discourage its
inclusion in an investment portfolio:
• Its heterogeneity
• Its lumpiness, which may prevent investors from creating optimal
portfolios
• Its illiquidity, which may reduce the opportunity to rebalance and sell
assets at fair market prices in a short period

6. Real Estate Investment Trusts (REITs)
• REITs (Real Estate Investment Trusts) are regulated investment
vehicles where investors like you and I pool their funds to invest
in real estate assets.
• In exchange for the money you invest, you are allocated units
from which you earn dividends and capital gains.

8. Types of REITs
• Development Real Estate Investment Trusts (I-REITs): A D-
REIT is a type of REIT in which investors pool their capital together
for purposes of acquiring real estate with a view to undertaking
development and construction projects and associated activities.
• Income Real Estate Investment Trust (D-REITs): An I-REIT is a
type of REIT in which the investors pool their capital for purposes of
acquiring long term income generating real estate including housing,
commercial and other real estate.

9. Types of REITs
• Islamic Real Estate Investment Trusts: This is a unique type
of REITs which only undertakes Shari’ah compliant activities. A
fund manager is required to do a compliance test before making
an investment in this type of REIT to ensure it is Shari’ah
compliant.

10. The structure of the REITs currently
registered in Kenya
• All REITs in Kenya are unincorporated Trusts registered at the
Ministry of Lands and Physical Planning.
• As you would expect of any Trust, it must have a board of Trustees
and management.
• Since the Trust is unincorporated, it is not a corporate body and as
such cannot legally own any property in its name. This is where
Trustees come in to own the property on behalf of the Trust and the
investors.

12. REITs Regulatory Framework
• In Kenya, REITs are regulated through a couple of laws
including:
• Capital Markets (Real Estate Investment Trusts) (Collective
Investment Schemes) Regulations, 2013
• The Capital Markets Act Chapter 485A

13. REITs Regulatory Framework
• In addition, REITs must comply with the following
requirements:
• International Financial Reporting Standards (IFRS)
• Accounting Standard IAS 34: Interim Reporting
• Nairobi Securities Exchange provisions

14. Authorized REITs
• There are only 3 Authorized Real Estate Investment
Trusts in Kenya:
• ILAM Fahari I-Reit
• Acorn Student Accommodation Development Real Estate
Investment Trust (Acorn D-REIT)
• Acorn Student Accommodation I-REIT (ASA I-REIT)

15. How do REITs work in Kenya?
• There are several parties involved in the structure of REITs.
• This is purposely done to improve transparency, and
accountability and ensure the interests of investors are fully
protected.
• The parties are:

16. How do REITs work in Kenya?
• Capital Markets Authority (CMA)
• It licenses, supervises, and monitors activities in the REITs
market to ensure your investment is safe.

17. How do REITs work in Kenya?
• A Trustee
• This could be a person or company licensed by CMA to
oversee the management and compliance of a REIT.
• Trustees take legal ownership of the assets in Trust and
ensure that the funds you contribute are invested in line
with the objectives and purpose laid out in the Trust Deed.

18. How do REITs work in Kenya?
• They charge a fee for their services.
• The Co-operative Bank of Kenya Ltd is the Trustee for
ILAM FAHARI I-REIT, Acorn D-REIT, and ACORN I-
REIT.

19. How do REITs work in Kenya?
• The REIT Manager
• The REIT manager is an entity appointed by The Trustee
with the sole responsibility of setting up and managing the
REIT’s investments.
• They charge a management fee and performance fee for
this service which is one of the main expenses the REIT
incurs.

20. How do REITs work in Kenya?
• The REIT Manager, on behalf of the investors, acquires,
manages, maintains, and disposes of REIT Assets.
• They are also responsible for appointing the property
manager, service providers and maintaining accounting
records.

21. How do REITs work in Kenya?
• The Property Manager
• This is a property management entity that enters into a
contract with the REIT manager to provide Property
Management services to the REIT.
• They are paid management fees from the REIT or directly
by the tenants.

22. How do REITs work in Kenya?
• Service providers - These are providers of
operational services to the REIT at a fee and are
appointed by the trustee. They include:
• Property managers
• Property valuers

23. How do REITs work in Kenya?
• Structural engineers
• Legal advisors
• Tax advisors
• Auditors

24. Advantages of REITS
• Long Term Returns- REITs offer investors competitive returns
as their performance is based on the performance underlying real
estate assets in the REIT structure
• Liquidity-REITs offer investors’ enhanced liquidity compared to
direct ownership of real estate assets. REITs thus enable investors
to easily buy and sell units in a trust which has invested in real
estate assets.

25. Advantages of REITS
• Consistent Income Stream– REIT structures specifically
income REITs are mandated by the law to distribute at least 80%
of their net after tax profits to their unit holders as dividends.
• This can provide a stable and consistent form of income annually
for unit holders.

26. Advantages of REITS
• Diversification– When combined with other asset classes, REITs
provide a unique diversification tool when incorporated in an
investment portfolio.
• Tax Benefits– REITs enjoy various tax considerations making them
an attractive asset class for investors. REITs are exempt from income
tax except for payment of withholding tax on interest income and
dividends. Equally, REITs are exempt from stamp duty, value added tax
as well as capital gain tax in some instances.

28. Questions?