4. Capital Markets (Real Estate Investment Trusts) (Collective Investment Schemes) Regulations, 2013

These Regulations provide for establishment and registration of Real Estate Investment Trusts (REITs) which are an innovative way of supply side financing of housing.

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· These Regulations provide a framework for the creation of Real Estate Investment Trusts (REITs) which in turn enable investors to aggregate diverse sources of funding by converting them into a portfolio that extends beyond the limitations of individual projects, thus dealing with the challenge of financing that affects the housing sector.

· There are 2 forms of REITS provided for in Kenya, I-REITS (Income REITS) and D-REITS (Development REITS). I-REITS can be issued on a restricted or unrestricted (i.e. publicly listed) basis. D-REITS, which carry significant development risk, must be issued on a restricted basis.

· The I-REIT can be offered on an unrestricted basis, with no minimum investment amount.

· There are limitations when REIT issuances are on a restricted basis (i.e. typically when they are unlisted). For restricted offers, REITS are only available to professional investors, who are required to invest a minimum of Kshs 5 million (Regulation 27(1)b).

· Insurance companies are not allowed to invest in REITS under section 50 of the Insurance Act Cap 487.

· Real Estate Investment Trusts (REITS) refer to collective investment vehicles through which investors (both retail and institutional) pool funds to invest in real estate assets. These trusts are usually professionally managed and are regulated by the Capital Markets Authority.

· Through REITS, investors or persons who would otherwise never have acquired real estate in their investment portfolio due to the huge capital outlay needed to acquire real estate or those who would not wish to bother with managing real estate are able to indirectly invest and own real estate and accrue associated benefits. However, despite the attractiveness of REITS and the regulations enabling it having been in force since 2013, there have only been four REITS being Acorn I-REIT and D-REIT, ILAM Fahari I-REIT which was delisted on 12th February 2024 and the LAPTrust Imara I-REIT which was issued on a restricted basis. The Acorn I-REIT trades on the Unquoted Securities Platform of the Nairobi Securities Exchange (NSE). These REITS have not managed to raise the capital (amounts) they sought to raise. The proposed Fahari D-REIT was unable to attract the minimum number of investors required to qualify it as a REIT. This indicates an underlying problem, especially given the general attractiveness of real estate as an investment asset class among Kenyans.

· There is possibly the need to allow flexibility in the structuring of a trust by allowing for other legal forms other than as a trust. Presently, REITS can only be constituted as a trust for them to obtain the approval of the Capital Markets Authority (CMA). Consideration may be given to allowing REITS to be incorporated as partnerships and companies as is the case in other jurisdictions such as the United Kingdom. The unattractiveness of trusts partly arises from the fact they are not as common and unknown/unfamiliar compared to partnerships and companies; and trusts raise concerns among investors who fear losing control whenever they seek to dispose of their interest through a REIT structured as a trust which forces them to apply for a retail manager licence or shying away from disposing their interest.

· In addition, the current limitation of a minimum of Ksh 5 million investment in D-REIT locks out individual investors who may not afford such high amounts or who may wish to diversify their risks across various asset classes. This may explain the failure of D-REITs to attract enough investors and capital as they lock out most individual investors. Already, majority of institutional investors have their own real estate portfolios. Accordingly, consideration should be given to reducing the minimum investment into D-REITS to say Ksh 500, 000 or 1 million.

· Whereas I-REITs are allowed to invest in development property only to a limited extent given that they are trusts meant to generate income from real estate, D-REITs usually hold income generating properties that they have developed. The law however requires REITS to identify either as I-REITs or D-REITs. The law can be amended to allow for and recognize a hybrid of I-REIT and D-REIT to manage the risks by allowing a stable income from I-REIT while allowing a higher return/higher risk arising from D-REITs, up to a particular extent to take care of potential risks.

· Additionally, the current requirement to list a REIT on the NSE before such REIT can be made public is also stifling growth of REITs. In the infancy stages of REITs where stability of income is assured, listing publicly on the NSE tends to erode the value of such REITs and therefore leading to undervaluation of their shares. The law may thus be amended to give a longer lead time before REITs are required to list, to enable REITs obtain a fair and true market valuation when they list.