Real Estate Investment Trusts: Are They For You?

Published on 10th June 2008

If you once invested in the Nairobi Stock Exchange, chances are that you made excellent returns over a short period of time.  Sadly though, you stand the risk of exposure to an array of factors characterized with investing in non diversified portfolio.  If you have considered diversifying your investment portfolio but didn't know which one to go for, then Real Estate Investment Trusts may be an option to consider.But again, you may ask; are they really right for me?

Simply put, a REIT is a pool of funds that is invested in real estate.Funds are drawn from investors and put under the management of a fund manager who then decides on the kind of real estate investment to go for based on the amount raised by subscribers for the trust.  REITs will typically invest in real estate or real estate related assets.  These can vary from shopping centers to office buildings, hotels and mortgages secured by real estate. 

There are three types of REITs but the most common one is an equity REIT.  The REIT basically entails having investors' pool funds by way of buying shares of the REIT and getting an income out of it.  This income is mostly paid on an annual basis.The other type, a mortgage REIT basically entails lending money to owners and developers or investing the money in financial instruments secured by mortgage or real estate.  A hybrid REIT combines both the features of a mortgage REIT and the equity REIT.  An investor in this category has his portfolio well diversified against the downturns in each category. 

The United States has the most developed REIT market in the world. Other rapidly expanding REIT markets include Australia, France, Japan, Canada, the Netherlands, Singapore and Hong Kong.  In Australia, the REIT concept was launched in 1971 with the General Property Trust being the first REIT to be listed in the Australian Stock Exchange (ASX).

There are over 60 REITs listed today and Australia has the largest property trust in the world after the United States.  Germany planned to introduce REITs in 2007 but the legislation is yet to be passed.  There are already seven REITs in Hong Kong.  In the United Kingdom, seven companies converted into REITs in 2007 after the Finance Act enacted a legislation allowing them to do so.

In Africa, REITs are also gaining popularity in some nations where financial markets are well developed.  Key in Africa is South Africa which, according to Ernst and Young, was the top performer in the world in terms of total return over three year period giving a return of 34%.  The number of public REITs in South Africa was seven by the end of 2006. However, the market had the lowest leverage among the key markets in the world.

Kenya's market is slowly coming of age.  Bora Real Estate Investment Limited (BREIL) was launched late last year at a point when Kenyans felt that the property market had completely sidelined the starters in the investment maze.  One of the reasons behind setting up BREIL, according to Joe Macharia, the CEO of Bora Capital (the company behind BREIL) was to provide an investment option that works for small savers who cannot put up a payment to acquire property or build a house.

The BREIL structure is a hybrid REIT but private (not listed in any market).  Investors invest in the fund by subscribing to shares of BREIL and getting a regular income on an annual basis.One of the advantages of investing in REITs is the tax advantage enjoyed by the investors.  This is so because REIT investing allows for tax rebates on gains. 

You can never go wrong on land.  The same applies to property as it can only appreciate in value.  An investor therefore looking for gains over the long term would benefit from investing in REIT as it offers stability over ones investment. 

One challenge with investing in REIT is that the target groups, mainly those within the age bracket of 25 to 45 are excited about short term gains.  This is not a common feature with REITs which are illiquid and have an investment time span of more than one year. 

REITs may just be what your investment portfolio needs. However, do observe caution in taking on REITs, contact your Investment Advisor for more information on the risks and benefits to your investment portfolio.

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