Real Estate Investment Trusts (REITs) in Kenya: How they Work and How to Invest

EDITOR’S NOTE: This article is part of our Money254 Partner Series produced in partnership with Vuka, an investment club that allows Kenyans to invest in the Acorn Student Accommodation I-REIT.

Do you want to enjoy some of the perks of being a landlord without needing high start-up capital, going into debt by taking a mortgage, or spending hours managing property and collecting rent from cunning tenants? 

Then, you should learn about REITs, an investment vehicle that lets you create a regular stream of passive income, has low-cost entry into the real estate market, and comes with the opportunity to build wealth as you benefit from property appreciation.

1. What Is a REIT

A real estate investment trust (REIT) is a regulated collective investment vehicle that owns, operates, and invests in a real estate asset by pooling funds from a group of investors. These properties can include commercial buildings, residential apartments, industrial facilities, and other real estate assets. 

The REIT leases out the property under its ownership to collect rent, generate income for the investors, and drive asset appreciation in the longer term as rent increases. The rental income collected by REITs forms the yield that is distributed back to shareholders as dividends. 

In Kenya, REITs are required by law to distribute at least 80% of their net income each year to shareholders. This allows REIT companies not to be subject to corporate income taxes and offer higher returns to the investors. 

There are two main types of REITs in Kenya:

Development REITs (D-REITs): These REITs invest in real estate development projects. They typically focus on acquiring land, developing properties, and selling or leasing them to generate returns. D-REITs might require a high minimum initial investment and are typically limited to professional investors in Kenya. 

Income REITs (I-REITs): These REITs invest in income-generating properties such as rental apartments, student hostels, offices, and shopping malls. They generate returns primarily through rental income and capital appreciation. 

I-REITs are open to the general members of the public and can be purchased through the Nairobi Securities Exchange (NSE) Unquoted Securities Platform. In this article, we are going to discuss I-REITs as an investment option in Kenya. 

2. How I-REITs Work

As established above, I-REITs pool money from individuals to purchase and manage income-generating real estate properties. 

For example, let's say an I-REIT manages assets worth Ksh1 billion. They divide these assets into shares, typically priced at a certain amount per share. They can be split into small units worth Ksh20 each - meaning there will be 50 million shares floated for sale, each going for Ksh20. You can then buy these shares, becoming a shareholder of the I-REIT.

When you buy units in an I-REIT, you effectively become a partial owner of the underlying real estate assets.

The I-REIT earns income primarily through renting out properties to tenants. This rental income is distributed among shareholders in the form of dividends. So, by investing in an I-REIT, individuals can earn passive income from real estate without having to manage properties themselves directly.

But that is not all. As the value of the underlying properties held by the I-REIT appreciates, so does the value of the shares held by investors. This means that investors can profit not only from dividends but also from capital appreciation.

Suppose you invested Ksh50,000 in the I-REIT in the example above with a share price of Ksh20. This could give you 2,500 shares (Ksh50,000 ÷ Ksh20 per share). 

Now, let’s say after one year, the value of the properties owned by the I-REIT increases, resulting in an overall portfolio value of Ksh1.2 billion. 

Since there are a total of 50 million shares, the new price per share would be Ksh24. The value of your 2,500 shares would be Ksh60,000 (2,500 shares × Ksh24 per share), resulting in a Ksh10,000 increase in the value of your investment.

To ensure transparency and maximum yield for shareholders, there are four parties involved in an I-REIT: 

1. Promoter: The entity responsible for initiating and establishing the income real estate investment trust (I-REIT) scheme. They seek approvals from regulatory authorities and issue I-REIT securities.
2. I-REIT Manager: A licensed company in Kenya authorized by the Capital Markets Authority (CMA) to manage real estate assets and funds on behalf of I-REIT investors.
3. Trustee: Acts on behalf of I-REIT investors, ensuring compliance with the Trust Deed and evaluating investment proposals from the I-REIT Manager.
4. Project/Property Manager: Oversees the management of the properties within the I-REIT, ensuring maximised revenue for the I-REIT investors. 

3. Reasons to Invest in I-REITs

With I-REITs, everyday investors have the opportunity to invest in real estate at an affordable price. There are various benefits of investing in I-REITs, some of which we will discuss below using the case study of the Vuka Investment Club. 

Vuka is a Kenyan innovation regulated by the Capital Markets Authority (CMA). It offers a convenient and transparent way of buying and selling Income REITs, including the Acorn Student Accommodation Income Real Estate Investment Trust (ASA I-REIT).

Launched in 2021, Vuka serves as a gateway to investing in income-generating real estate properties, initially through the Purpose Built Student Accommodation (PBSA) brands Qwetu and Qejani; two major student accommodation brands in Kenya, with nearly a dozen properties near Nairobi's major university campuses.

With as little as Ksh5,000, you can add residential buildings to your investment portfolio. While this accessibility can attract people to this investment vehicle, it's not the only reason to invest in I-REITs. 

Below, we highlight some of the reasons to invest in I-REITs, using Vuka as a case study. 

a) Wealth Diversification

Diversification is a crucial aspect of any investment strategy, and it becomes even more significant when building a solid investment portfolio. Adding I-REITs to your investment portfolio can help reduce overall portfolio risk and increase returns.

Firstly, you'll gain exposure to the real estate market without directly purchasing and managing physical properties. Instead, you're investing in a diversified portfolio of real estate assets, that can include residential apartments, student accommodation, commercial office spaces, retail centers, hotels, and more. 

Secondly, I-REITs offer diversification within the real estate asset class itself. For example, a single REIT might own properties in different geographical locations or sectors, such as residential, office, and industrial properties. With the case of Vuka, you get a share in several properties across Nairobi, from Hurlingham to Ruaraka, to Parklands, Wilson View, Karen, among other areas through the Acorn Student Accommodation I-REIT (ASA I-REIT). 

Finally, Real estate investments tend to have a low correlation with stocks and bonds, which means they may perform differently under various market conditions. If you include I-REITs in your portfolio, you can reduce overall portfolio volatility and enhance risk-adjusted returns.

b) Capital Appreciation

Over time, the value of real estate properties held by an I-REIT may increase due to inflation, growing demand for space, or improvements made to the properties. As the value of the underlying properties rises, so does the value of your I-REIT shares.

You can benefit from capital appreciation in two main ways. Firstly, if you decide to sell your I-REIT shares at a higher price than you purchased them for, you can realize a capital gain. Secondly, even if you choose to hold onto your I-REIT shares, the increasing value of the underlying properties can contribute to your overall portfolio growth and net worth. 

With Vuka, the properties under its management are valued twice every year and the price adjusted every two years. The average annual increase for appreciation alone is about 4%. 

c) Income Generation

I-REITs are known for their ability to generate passive income through rental income. Unlike many other types of investments like stocks, I-REITs in Kenya are legally required to distribute at least 80% of their net earnings to their shareholders. 

This makes REITs particularly attractive for income investors seeking consistent cash flow from their investments. Given that I-REITs are backed by physical assets, the dividends paid by i-REITs are more consistent compared to other investments. With Vuka, the average annual yield currently stands at 5-7%. 

d) Compound Returns to Build Wealth

One of the most potent aspects of investing in I-REITs is the ability to reinvest dividends to generate compound returns. When you reinvest your dividends, you use them to purchase additional shares of the i-REIT, which in turn generate more dividends. Over time, this compounding effect can lead to exponential growth in the value of your investment.

For example, let's say you invest in an I-REIT that pays a 7% dividend yield. If you reinvest those dividends each year, your investment will grow through capital appreciation, thus increasing the number of shares you own. 

Over the long term, this significantly accelerates your wealth creation journey. Consider this example. You have a young child and you are using I-REITs to invest in their high school or university education. 

If you decided to save Ksh5,000 with Vuka with a target 7% dividend yield, your investment would be worth Ksh875,000 in 10 years; out of which Ksh270,000 would be interest from the dividends. This is without factoring in the capital appreciation adjustment. 

e) Liquidity

I-REITs offer investors liquidity, meaning they can easily buy and sell your shares as needed. 

Unlike traditional real estate investments, which can be time-consuming and challenging to sell, I-REIT shares can be bought and sold easily. This liquidity provides investors with flexibility and allows them to adjust their investment portfolios as needed quickly.

For example, through the Vuka Investment Club, the transactions - for both the purchase and sale of the ASA I-REIT - are usually executed on the last day of the month. This ease of trading makes I-REITs a convenient option for investors who value liquidity and want to maintain the ability to access their investment funds quickly.

How to Invest in I-REITs in Kenya (A Case Study of Vuka)

To invest with the Vuka Investment Club, you begin by sharing your contact details on the Vuka website. You will then receive an email invitation to complete your application to become a member.

Upon receiving the invite, create an account on the Vuka Portal by clicking the link in the invitation email and following these steps:

1. Complete the KYC (Know Your Customer) by uploading the required documentation (copy of ID, copy of KRA PIN certificate, and a passport-size photograph) and completing a quick video verification.

2. Choose the best subscription based on your desired investment amount. Vuka offers five membership categories for individuals:

• Silver: Up to Ksh100,000 per year; joining fee Ksh299
• Gold: Ksh100,000 - 200,000 per year; joining fee Ksh499
• Platinum: Ksh200,000 - 500,000 per year; joining fee Ksh999
• Platinum+: Ksh500,000 - 1 million per year; joining fee Ksh1,499
• Diamond: Ksh1 - 2 million per year; joining fee Ksh1,999

You can also join Vuka as a Chama, this requires your chama to invest a minimum of Ksh300,000 per year.

3. After selecting your membership category and completing all KYC requirements, you'll be prompted to pay the joining fees, which can be done via M-PESA or Bank transfer.

4. Once you've completed the process, you'll become a Vuka member and can start buying the I-REIT units through the platform. One unit of the ASA I-REIT available on the Vuka platform is currently priced at Ksh21.65.

Wrapping Up

I-REITs allow investors to benefit from real estate without needing a large upfront investment. With I-REITs, you can earn rental income in the form of dividends without being actively involved in property management.

Additionally, I-REITs invest in tangible assets, such as Purpose Built Student Accommodation (PBSA) brands like Qwetu and Qejani. They play a crucial role in diversifying your investment portfolio, helping spread risk while maximizing returns through capital appreciation and dividends.

For example, the Vuka Investment Club which allows you to invest in the Acorn I-REIT provides investors with two types of returns: capital appreciation and dividends. The average annual dividend yield currently falls within the range of 5-7%, while the annual rate of capital appreciation is 4%. This combination results in a targeted total average return of 11% annually.