African REITs will take time

The growth of REITs could help African nations harness the opportunity that the market offers and increase accessibility of long term funds for developers on the continent, reports Ortneil Kutama, Africa Property News Media Director.

It could take years before there are Real Estate Investment Trusts (REITs) in African countries other than South Africa. But the wait will be worth it as the continent offers strong future GDP growth supported by a large population, untapped resources and growing wealth.

The growth of REITs could help African nations harness the opportunity that the market offers and increase accessibility of long term funds for developers on the continent, reports Ortneil Kutama, Africa Property News Media Director.

Africa's population is expected to double to 2.4-billion people by 2050.

One country which is standing out as a potential destination for REITs is Kenya. The East African country will become the second African country to gain REITs status by 2016, according to authorities.

In fact after many years of campaigning, REITs are in the process of being introduced to the Nairobi Stock Exchange (NSE), and the Kenyan business chamber is confident this will be a successful process.

With the recent growth and maturity of the real estate sector this has been long overdue. Kenya will become the 41st country in the world to introduce Reits. This should attract competition in the real estate sector from South African funds themselves.

This will create a bigger Kenyan property market. Stanlib head of listed property funds Keillen Ndlovu says South African companies are looking at fast growing African economies including Kenya. Kenya has an improving telecommunications market. It is becoming a hub for multinationals in East Africa.

Kenya has created various aspects around the Reit structure. Reits may choose to focus on one main genre of real estate or may diversify to all types in Kenya.

Kenya’s property market has enjoyed exponential growth over the years. 

In terms of the proposed structures; development property should be restricted to 15% of the Reit value. This will help restrict the risk that comes with developing property.

To encourage existing property management companies and property investment companies to convert to Reit structures, majority ownership will be only allowed up to 50% for the primary sponsor. All other investors’ stake will be restricted to a maximum of 25%.

A minimum of 100 shareholders would be required for a publicly listed Reit in order to create liquidity. As much 90% of the income generated be distributed to shareholders as dividends.

The Kenyan Reit Association is encouraging more Reits to list on the Nairobi Stock Exchange in the future.

The SA Reit Association say that first there must be a larger listed property market in African countries such as Nigeria before there can be other Reit structures.

The Reit capital structure is used in many countries. It was recently adopted in South Africa, having taken years to introduce the structure to the country. Globally, investors understand the structure. 

Reits use an ordinary share structure rather than a complex, linked-unit structure and pay out most of their profits to shareholders.

Reits globally follow a similar tax dispensation. Since the introduction of the system in SA in 2013, the big, listed property funds have joined new Reit-focused indices, which has led to foreign investment into South African Reits.

However, most African countries have not yet become a big enough listed market to sustain a Reit structure. The African funds not only need scale but also transparency in terms of their accounting practices and corporate governance, Vukile Property Fund CEO and head of the SA Reit Association, Laurence Rapp says.

African Reits would need to pay out regular income distributions. Many fund managers say that many African property funds cannot guarantee that they will be able to do so. Apart from Kenya, they should be capital growth plays and not may out any income for a few years and not be Reits.

"You want to rather invest in these African funds while having a long term view to them as a investments. It will take years for many African funds to develop malls and housing and other property types and to develop the infrastructure to support those properties," Old Mutual Investment Group portfolio manager Evan Robins says.

Some analysts believe that first all the South African or many of the South African investors that have funds in Africa, should pool these funds to create one large African property based fund. With scale this fund could perhaps become a Reit in the future, according to Mr Ndlovu.

Fund managers have been trying, in recent years, to attract more pension money to SA's listed property sector, arguing that their funds are regularly audited, carefully managed and well-kept and that they provide regular income returns and capital growth.

Ideally African Reits could eventually be big enough to be invested in by large pension funds.

Distribution growth then becomes a key factor for Reit investors as each South African Reit must pay at least 75% of its taxable earnings available for distribution to its investors each year. This is attractive to pension funds.

This will all take a fair bit of time and patience.

"Let's first create African funds, list them and enjoy sustained capital growth before we try to convert them into Reits that are sustainable investments," Neil Stuart-Findlay of Investec Asset Management says.