What are REITS
What are REITS?
REITs, or real estate investment trusts, are companies that own or finance income-producing real estate across a range of property sectors. These real estate companies have to meet a number of requirements to qualify as REITs. Most REITs trade on major stock exchanges, and they offer a number of benefits to investors.
REITs provide an investment opportunity, like a mutual fund, that makes it possible for everyday citizens to benefit from valuable real estate, present the opportunity to access dividend-based income and total returns.
REITs allow anyone to invest in portfolios of real estate assets the same way they invest in other industries – through the purchase of individual company stock or through a mutual fund or exchange traded fund (ETF). The stockholders of a REIT earn a share of the income produced – without actually having to go out and buy, manage or finance property.
REITs invest in a wide scope of real estate property types, including offices, apartment buildings, warehouses, retail centers, medical facilities, data centers, cell towers, infrastructure and hotels. Most REITs focus on a particular property type, but some hold multiples types of properties in their portfolios.
How Do REITs Make Money?
Most REITs operate along a straightforward and easily understandable business model: for example, By leasing/owning space and collecting rent on its real estate, the company generates income which is then paid out to shareholders in the form of dividends.
Why invest in REITs?
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.
- 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.
- 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.
REITs deliver competitive total returns, based on high, steady dividend income and long-term capital appreciation. Their comparatively low correlation with other assets also makes them an excellent portfolio diversifier that can help reduce overall portfolio risk and increase returns. These are the characteristics of REIT-based real estate investment.
REITs' have a track record of reliable and growing dividends, combined with long-term capital appreciation through stock price increases Reits provide investors with attractive total return performance for most periods compared to the broader stock market as well as bonds and other assets.
How Do REITs Operate in Kenya?
The Capital Markets Authority (CMA) oversees the regulatory framework for REITs in Kenya. This governance structure aims to protect investors and promote transparency in several ways.
Types of REITs
There are three main types of REITs and they include:
- Development Real Estate Investment Trusts (D-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 (I-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.
- 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.
Current Reits issuers in Kenya are ILAM and Acorn Holdings Limited.
