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News and Analysis
May 2, 2024
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.
If you are interested in finding an alternative way of owning prime real estate without having to put up hundreds of millions, then you will enjoy the contents of this article. Real estate is one of the most popular forms of investment in Kenya.
If you were to walk around town asking random people what they would do if they won a Ksh50 million lottery, you can be sure that the majority of them would mention some form of real estate investment - buying a piece of land, building a house for themselves or their parents, building rentals, etc.
There are various reasons why Kenyans are attracted to real estate investments. Some of them include the historic appreciation of real estate over time. Almost every Kenyan family will have a story of an uncle, auntie, or grandfather who bought a property at a throwaway price 20 years ago and the value has now multiplied beyond their imagination.
There is also the factor of rapid urbanisation coupled with a growing demand for housing. According to the UN-Habitat, Kenya has an annual demand for 250,000 housing units - against a supply of only 50,000 new units every year. The growing demand results in increased rental prices and more rental income for landlords.
Rental income becomes even more desirable for Kenyans because it not only increases over time but is also a form of passive income. Landlords continue to enjoy the fruits of their labour even in retirement.
They can wake up and play golf all day with the assurance that their capital will continue to yield something substantial at the end of the month. This makes real estate investments desirable for many Kenyans - both the young and the old.
While real estate investments have gained popularity in Kenya on account of their consistency in capital appreciation, the cost of entry is increasingly getting beyond the reach of most Kenyans. This is particularly the case when it comes to property that can generate rental income.
For instance, in the Nairobi metropolitan region, very few Kenyans can afford to buy land with an acre of land in some areas, such as Upperhill, going for more than Ksh500 million.
The problem is further compounded by the relatively high construction costs. It requires a substantial amount to build a permanent house in Kenya, particularly in the Nairobi metropolitan region where a simple 2-bedroom unit will likely cross the Ksh2 million mark - exclusive of the cost of land.
In response to this challenge, various stakeholders have been innovating ways to lower the cost barriers to participation in real estate investments in Kenya. In 2013, the Capital Markets Authority (CMA) introduced a legal framework to encourage collective investment trusts, including Real Estate Investment Trusts (REITs).
REITs allow individuals to invest in real estate without having to buy, manage, or finance any properties directly. Studies have shown that REITs have contributed greatly to helping ordinary people invest in real estate in developed and developing countries such as in the US, UK and South Africa, among others.
In this article, we discuss the place of REITs in Kenya’s growing real estate market, using Kenya’s premier I-REIT as a case study to help you decide if it is an investment option you’d want to add to your portfolio.
A REIT is a regulated collective investment vehicle where investors jointly invest in real estate. REITs allow more people to invest and earn from real estate investments that might otherwise have been beyond their individual reach.
There are two categories of REITs. Investors may come together to build a property that they will later sell at a profit. This is known as a Development REIT or a D-REIT and in Kenya, they are restricted to professional investors only.
The other category of investors is those who pool funds to buy an already established property or even build one to generate rental income, this REIT category is known as an Income REIT or an I-REIT. Investing in I-REITs is generally not restricted and therefore open to the public, everyday Kenyan.
The general working of an I-REIT mirrors that of a listed company that sells its shares based on valuation and shares future income with shareholders based on performance.
A valuation is done to determine the value of the total assets owned by the REIT. Then the value is split into smaller units which investors can buy as a share of the entire property.
For example, assuming the assets managed by a given REIT are worth Ksh1 billion, they can be split into small units (shares) worth Ksh20 each - meaning there will be 50 million shares floated for sale, each going for Ksh20.
In the subsequent valuation, the property's value could be say Ksh1.2 billion. Since there are 50 million shares, the value of each share would rise to Ksh24.
Assuming that each month you have been investing Ksh5,000 in the REIT, in 10 months you would have bought 2,500 shares worth Ksh50,000 at the first valuation.
In the subsequent valuation at the end of the year, your shares would be worth Ksh60,000 due to capital appreciation if you were to decide to sell.
Remember, the primary objective in setting up an I-REIT is to generate income for investors. Unlike companies where profits can be invested back into the business, REITs are highly regulated on how they can utilise the income generated from their assets.
REITs in Kenya are required by law to distribute at least 80% of their net profit after tax to their shareholders (unitholders) as dividends. As such, REITs are a source of passive income in addition to the capital appreciation.
In the example provided above, if the property generated Ksh100 million as net profit, at least Ksh80 million would have to be paid as dividends to all unitholders proportionately.
In this case, the dividend earned per share would be Ksh1.6. With your 2,500 shares you would earn Ksh4,000 as dividends.
In summary:
To put this in perspective, let us consider the example of the Vuka. This is the platform that is giving everyday Kenyans an opportunity to invest in the Acorn Student Accommodation Income Real Estate Investment Trust (ASA I-REIT) which is asset-backed and CMA-approved.
Vuka, which was launched in 2021, is the gateway to investing in the already income-generating real estate properties under ASA I-REIT that are managed under the Purpose Built Student Accommodation (PBSA) brands Qwetu and Qejani.
Vuka is managed by Acorn Investment Management Limited (AIML), which is licensed by the Capital Markets Authority (CMA) as a REIT manager.
Qwetu and Kejani are some of the biggest brands in student accommodation in Kenya, with several properties in the Nairobi area - close to major university campuses.
The residences include:
One unit of the ASA I-REIT that can be purchased via the Vuka platform is currently retailing at Ksh21.65. It is updated twice a year, during the announcement of the full-year results and the interim results.
These adjustments are made in line with changes in rental rates for the underlying assets, which impact the Net Asset Value of the I-REIT.
Investors have the ability to trade among themselves on the platform by placing buy and sell orders whenever one wants to liquidate their investment such as during an emergency. In instances where there are surplus buy or sell orders, they are traded in the Nairobi Securities Exchange (NSE) Unquoted Securities Platform.
The transactions, for both purchase and sale, are usually executed on the last day of the month.
Vuka provides investors with two forms of returns - capital appreciation and dividends.
To invest with Vuka, the first step is to create an account, you can start your sign-up by sharing your contact details on Vuka here.
You will receive an email invite prompting you to complete your application to become a Vuka member.
You will be prompted to input your mobile phone number and create the password you wish to use.
In the next step, you will indicate whether you are joining as an individual or as a chama:
If joining as an individual;
Vuka has 5 membership categories depending on the amount invested, and a chama subscription model:
As an individual, the subscriptions are as follows:
The chama investment club allows your chama to invest a minimum of Ksh300,000 per year.
Once you have picked your membership category, you pay a joining fee that is pegged on the category you choose, i.e:
As a rule of thumb, having a broad range of financial assets in your portfolio is critical in building and protecting your wealth. You want to spread risk across different asset classes, reducing exposure to any single investment's volatility, thereby enhancing returns.
Vuka provides you exposure to the real estate market, diversifying your portfolio beyond traditional financial assets like MMFs, government securities, and bank deposits. This diversification can help spread risk and enhance overall portfolio stability.
One of the major attractions of real estate investments in Kenya is the consistency in appreciation. Land and property have stood out as some of the most consistent investments when it comes to capital appreciation. By investing with Vuka, you are buying into physical properties that are expected to appreciate over the years.
Real estate investments in the Nairobi metropolitan area have benefited greatly from inflation as the prices are increasingly soaring over the years, compared to other forms of investments.
The assets you get a piece of through Vuka are located in prime areas in Nairobi including Hurlingham, Parklands, Karen, Ruaraka, Roysambu (USIU area), and Jogoo Road.
These are all fast-growing areas strategically located close to critical amenities and will consistently appreciate in value in the coming years. Each valuation typically results in an increase in the value of the property and this increases the value of the units bought. Vuka has so far returned an average annual rate of appreciation of 4%.
Passive income is increasingly becoming desirable, particularly with the rising inflation that is lowering the value of active incomes and uninvested savings. By joining Vuka, you get to own a piece of real estate that is managed by professionals and generates income without your active input.
You get to be in the same position that a landlord sits, without having to actively look for tenants, handle repairs, rental income taxes, etc.
The passive income comes in the form of dividends which are paid out twice a year - based on the rental income earnings from the Acorn Student Accommodation I-REIT.
The dividend yield for Vuka averages 5-7% annually, and this is exclusive of the capital appreciation returns.
Investing in Vuka can help you achieve specific financial objectives by leveraging the stable income streams generated from real estate properties. For instance, you could use Vuka to save for your child’s school fees in the long term.
You would contribute small amounts such as Ksh5,000 monthly which would compound from the appreciation and rental yield - delivering a compounding effect in the long term. Other long and medium-term financial goals include building a home, starting a business in the future, buying a piece of land, etc.
Real estate investments are a common feature when it comes to retirement planning.
Both the young and the old have bought pieces of land or houses because they wanted to leverage the appreciation and the passive income aspects of real estate.
However, traditional real estate investments come with some limitations. They are capital intensive and some retirees deplete their savings before completing what ought to have been their lifeline.
Others spend their retirement going through the hassles of construction - an unpleasant experience for someone who is not experienced in the field. Not to mention that the traditional real-estate investments are highly illiquid.
A plot of land or a rental building may appreciate greatly but it’s slow to sell and may therefore be less helpful when the owner needs quick cash, say to pay a medical bill.
Investing in I-REITs through Vuka provides the same benefits of capital appreciation and passive income while at the same time providing liquidity. You can sell your units at any time of your choosing.
What is more? You do not have to be involved in negotiating with tenants and chasing after fundis to see through your investment.
REITs provides a unique opportunity for Kenyans to own and invest in real estate without some of the common restrictions which include:
Because REITs invest in tangible assets, such as the Qwetu and Qejani brands of Purpose Built Student Accommodation (PBSA), REITs are important in diversifying your wealth portfolio to spread risk while at the same time maximising returns through capital appreciation and dividends.
In the medium and long term, the returns on REITs offer a compounding effect that could be useful for goal-based savings, such as paying high school fees for your young child; planning for retirement, building a house, etc.
Want to explore this opportunity? Start the journey with Vuka here.
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