Taking a Loan to Buy Land vs Investing in I-REITs: What the Math Says

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.

Everyone wants to build wealth, but there is rarely consensus on how to do it. Some investments, however, are more popular than others. For instance, real estate is one of the most popular ways to build wealth in Kenya and many parts of the world. 

Now, the question we ask in this article is in your journey to building wealth - particularly through real estate - would you rather take a loan to buy land or slowly invest in Income REITs? 

Let us expand the discussion with more context; 

1. Buyer A takes a Ksh600,000 loan at the market rate of 21.6% to buy a piece of land and repays it in 36 monthly instalments of Ksh23,540
2. Buyer B acquires shares in an I-REIT by making monthly purchases of Ksh23,540 every month for 3 years (36 months)

But first, let us discuss how the two investment options work. 

Buying Land for Speculation

Among the middle and lower classes, the popularity of real estate investments is evident in the numerous land-buying companies that are mushrooming around the country. 

This class of buyers acquires land intending to speculate - hold it for re-sell, settle or build rentals on the pieces of land later, if and when the amenities move there. 

From billboards, radio, and TV advertisements to TikTok and YouTube - influencers are ever-introducing various land projects popularly known as “Buroti maguta maguta”. 

Many of these pieces of land are located on the outskirts of major towns and majorly work on the premise of potential growth in the area. They are relatively cheap and affordable, mainly because these areas are undeveloped. Like the discovery of an oil field in a desert, the plots are built on the hope of the remote area opening up - roads, bypasses, a proposed university, or even a wealthy person or company buying a nearby piece of land. 

If the new road is eventually built, then it works and the plot doubles or triples in value. However, in other cases, the appreciation is painfully slow. The remote area takes too long to appreciate, especially when the roads or amenities promised turn out to be false or there is a simple change in government policy. 

How I-REITs Work 

In the recent past, Kenya has adopted innovation to facilitate various ways of investing in real estate in line with global trends. In 2013, the Capital Markets Authority (CMA) introduced regulations to govern Real Estate Investment Trusts (REITs). 

An Income REIT (I-REIT) is a company that owns and manages income-generating real estate assets such as an apartment building or an office block. The value of the building is turned into units (shares) which individual investors can buy and own a percentage corresponding with their shares. 

For example, if an apartment block is valued at Ksh100 million and the I-REIT has 5 million shares, then each share would be worth Ksh20. If an investor buys 50,000 units for Ksh1 million, then they would own 1% of the building. 

If the REIT is paying out Ksh10 million of rent over a certain period, then this investor earns 1% of it in dividends(Ksh100,000). 

The same applies to capital appreciation. If the valuation shows the building has grown in value at 10% over a certain period, then the investor’s share also records a 10% growth value. The Ksh20 unit would now be priced at Ksh22, and the total investment would now be worth Ksh1.1 million up from Ksh1 million. 

Because of the power of collective investing, I-REITs typically invest in prime areas where there is consistency in appreciation and rental income. In Nairobi, for instance, an acre of land in the upmarket areas of Karen, Hurlingham, and Wilson View is beyond the reach of many individual investors. Through REITs, however, investors can pool resources and start cashing in rental income. 

Taking a Loan to Buy Land

As mentioned earlier, for purposes of this discussion, we take the example of a buyer taking a Ksh600,000 loan to buy a piece of land. 

One of the areas where one can get a decent piece of land at that price is in Kibiku - on the outskirts of Ngong town. A land price report released by Hass Consult in February this year identified the area as having the highest appreciation rates among satellite towns close to Nairobi. 

Today, the average interest charged by commercial banks for loans stands at 21.6% - with some customers paying as high as 28% depending on their risk profile. 

Assuming one takes Ksh600,000 to repay over three years (36 months), then each monthly instalment would be Ksh23,540. At the end of the three years, the applicant would clear the loan after paying a total of Ksh847,246. 

Value of Land After Appreciation

Our example assumed that the buyer acquired the land in Ngong, recorded as the fastest-growing satellite town in the Nairobi metropolitan region. The area had an average annual appreciation rate of 8% in 2024. 

Assuming that the appreciation rate is constant, then the value of the piece of land would be around Ksh750,000 after three years. 

Another area where Ksh600,000 would have fetched a decent piece of land is Juja Farm - the area is also among those with the highest appreciation rates at 4.6% - meaning the land would be worth about Ksh682,000. 

Going the I-REITs Route

We will consider the result if Buyer B opted to use an Income REIT to invest in real estate. We will use a case study of the Vuka Investment Club, a platform that allows Kenyans to buy and sell Kenya’s premier I-REIT - the Acorn Student Accommodation I-REIT. 

The ASA I-REIT is behind the Qwetu and Qejani brands of student accommodation units in strategic locations in Nairobi including in Hurlingham, Karen, USIU area, Wilson View, Parklands, and Ruaraka, among others. 

One unit of the ASA I-REIT, which is bought and sold through the Vuka platform, is currently going for Ksh22.03. 

The assumption is that the buyer uses the same amount that Buyer A uses on loan instalments. That is Ksh23,450 every month. The earnings on this money are twofold. 

Dividends (Rental Income) 

Vuka has a target dividend return of 5-7%. Assuming dividend returns a consistent 7% over the next 3 years, and Buyer A re-invests back the interest, then they would have investments worth approximately Ksh950,493 - out of which about Ksh82,843 would be from the interest alone. 

Capital Appreciation

The annual appreciation rate for the ASA I-REIT is approximately 4%. Assuming this was consistent over the 3 years, the value of one unit would rise from Ksh22.03 in year one to about Ksh22.91 after the first year. 

This would see Buyer A make approximately Ksh11,254 from the capital appreciation at the end of year one. 

After Year 2, at an average appreciation rate of 4%, the value would rise from Ksh22.91 to Ksh23.82. This would earn the buyer approximately Ksh22,815. 

At the end of Year 3, if the price again increased by 4%, then the price would rise to Ksh24.77. Buyer B would earn approximately Ksh35,040 at the end of the third year. 

Value of the REITs After 3 Years

The value of the REITs held by Buyer B would be approximately Ksh999,198 i.e

• Principal - Ksh847,246
• Interest - Ksh82,843
• Capital Appreciation - Ksh69,109

The results show that Buyer B would be in a more comfortable position to buy the piece of land bought by Buyer A in cash. 

The appreciation shows the land would be worth around Ksh750,000 after 3 years, meaning Buyer B can buy it then and still have a balance of about Ksh249,198 which would be enough to start construction, say lay off the perimeter fence. 

Alternatively, Buyer B would be in a position to buy land in a more prime area without having to save more. 

Wrapping Up

Other than the returns, the decision on whether to take a loan or invest in I-REITs has to factor in other factors including: 

• Personal Circumstances: You may need a piece of land for very specific needs, say when it’s a distress sale being sold far below its actual value or when you have a guarantee that the land will appreciate at a faster-than-average rate. 
• Liquidity: This refers to the ease with which you would turn your investment into cash. In this case, I-REITs can be easily liquidated as the units can be sold to investors directly on the Vuka platform or through the Unquoted Securities Platform of the Nairobi Securities Exchange (NSE)
• Flexibility: While both scenarios assume that you can comfortably raise the instalments with ease, the flexibility is different. When you take a loan, you have to maintain the instalments and default may have serious consequences - the least of which is late penalties. On the other hand, you can increase or decrease the amount of I-REIT units you are buying through the Vuka platform based on your circumstances with no penalties. 

More importantly, there is no right or wrong way in how you save or invest your money, it all boils down to what you need. If the I-REITs option interests you, you can reach out to the Vuka team here and see if it's a good option for your investment needs.