News and Analysis
November 21, 2024
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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.
Real estate investments are incredibly popular in Kenya. Both the young and the old want to own land and property.
Some of the reasons are deeply cultural, many communities in Kenya place premium cultural value on owning land. But the popularity of real estate goes beyond the cultural, the consistency in the appreciation of value and rental earnings supports it.
It does not matter if the economy is doing well, whether the weather is good or bad, or if there is a pandemic - people will always need a place to live. In fact, when there is inflation such as the global cost of living crisis, the cost of rent often goes up.
In this article, we discuss why you should have real estate investments in your portfolio, using the example of I-REITs as presented by the Vuka Investment Club.
Despite the popularity of real estate investments in Kenya, it has been a preserve of the wealthy class for many years. Most of the prime land close to major infrastructural projects costs an arm and a leg.
In Nairobi, for instance, an acre of land in the CBD, Kilimani, Parklands, and other areas with a high demand for housing costs is well above Ksh100 million. This is beyond the reach of most Kenyans.
In response to the challenge of high startup costs that many Kenyans face when considering investing in income-generating real estate, the Capital Markets Authority (CMA) introduced a regulatory framework that now allows Income Real Estate investment trusts (I-REITs) to operate and be regulated under Kenyan law.
An I-REIT is a company that is legally mandated to own and manage income-generating properties on behalf of its shareholders (unitholders).
Individual investors collectively raise cash in small amounts which is then pooled together to buy real estate assets such as apartments, office blocks, hostels, etc. that are already generating rental income.
Each investor gets a share representing a percentage of ownership equivalent to their contribution. This ownership share is also used to divide the rental income. For instance, a hostel block may be worth Ksh50 million with Ksh10 million shares worth Ksh5 each. When you invest Ksh50,000 over a certain period, you own 10,000 shares which is about 0.1% of the entire building.
When the hostel receives rental income, you would then be entitled to 0.1% of the profit. When the value of the building increases, say to Ksh55 million, the value of each share also increases from Ksh5 to Ksh5.50. Thus, your units or shares also increase from Ksh50,000 to Ksh55,000 - and so on.
Based on the simple explanation of how I-REITs work, one of the major reasons to have them in your portfolio is that they offer instant passive income.
Passive income refers to earning money without actively working. Many Kenyans invest in real estate in search of passive income. Traditionally, this would involve buying or inheriting land and then developing it for commercial use - saying building rentals.
The development phase is quite costly and can take time. Many landowners in Kenya end up holding on to valuable but unutilised land that does not earn them any money in their entire lifetime.
Through I-REITs, however, passive income becomes a reality from the start of the investment.
With the Vuka Investment Club, for example, you can start buying the Acorn Student Accommodation Income Real Estate Investment Trust (ASA I-REIT) for as low as Ksh5,000 per month.
The ASA I-REIT is Kenya’s premier I-REIT that is behind the Qwetu and Qejani brands of student accommodation units. One unit of the ASA I-REIT is currently retailing at Ksh22.03. It is updated twice a year, during the announcement of the full-year results and the interim results.
The investment is ideal for medium to long-term investors hoping to invest for at least 3 years. Passive income comes from the rental income generated from the Qwetu and Qejani student accommodation units that are managed by the ASA I-REIT.
The dividend yield for Vuka averages 5-7% annually, and this is exclusive of the capital appreciation returns.
I-REITs, like other real estate investments, come with the benefits of capital appreciation. In I-REITs, when the value of the property goes up, the value of your investment increases at a corresponding rate.
Because of the resources being pulled together from different investors, I-REITs can invest in areas where there are consistent appreciation rates. For example, the ASA I-REIT has properties in areas such as Karen, Wilson View, Hurlingham, USIU area, among others.
Capital appreciation can significantly contribute to building your wealth portfolio. Firstly, as the value of your real estate investment appreciates, your overall net worth increases. This can provide you with greater financial security and stability.
Secondly, capital appreciation in I-REITs protects your wealth from inflation, providing a hedge against rising prices and preserving the purchasing power of your money.
Thirdly, capital appreciation can increase your earnings on the dividends earned from rental income. As the value of the property under the I-REIT grows, the rental units enjoy higher rental rates, increasing your dividend earnings.
Liquidity is a major factor in achieving financial freedom. While traditional real estate investments have been effective in building wealth, they have often faced the problem of illiquidity. Liquidity refers to the ease of turning an asset into cash. There are many reasons you may want to turn a real estate investment into cash, for example;
With a traditional real estate investment, say a physical piece of land, it takes months - and sometimes even years to liquidate. However, I-REITs can help you build a portfolio that enjoys the benefits of real estate investments - but is also liquid.
For example, through the Vuka Investment Club, you can buy and sell your ASA I-REIT units to fellow investors on the platform which is regulated by the Capital Markets Authority (CMA).
Units can also be traded on the Unquoted Securities Platform of the Nairobi Securities Exchange (NSE).
A diversified portfolio helps protect your wealth from adverse market forces. As a rule of thumb, it is advisable to have your investments spread across a range of assets, such as Sacco deposits, stocks, bonds, real estate, unit trusts, etc.
With I-REITs, you can invest in real estate while building wealth through your other investment vehicles. Since I-REITs have a low initial capital requirement, you can buy I-REIT units and continue with other investment commitments - an MMF for your emergencies, a Sacco for your long-term credit needs, bonds and T-Bills when the rates are favourable, buying land, building, etc.
Beyond diversifying in the asset classes, I-REITs allow you to diversify even further in the real estate market. For instance, with the Vuka Investment Club, you can own properties spread across the Nairobi region.
The ASA-IREIT gives you ownership in buildings located in Karen, Jogoo Road, USIU area, Parklands, Wilson View, and Ruaraka, among others. The diversification goes further beyond the location as you can use REITs to invest in various units in the real estate sector- from student accommodation units to apartment complexes, or even office blocks. This ensures you enjoy maximum returns by having a piece of all the performing markets in the real estate sector.
Investing in Income Real Estate Investment Trusts (I-REITs) presents a number of opportunities in your wealth-building journey. For a start, I-REITs offer instant passive income, providing returns from rental earnings without the need for active management or bearing the high initial development costs.
I-REITs offer the potential for capital appreciation, safeguarding against inflation and bolstering overall net worth. I-REITs also offer liquidity, allowing investors to easily convert their assets into cash when needed. Further, they facilitate diversification, enabling investors to spread their wealth across different investment products as well as various real estate sectors and locations.
These benefits present a compelling reason to consider including I-REITs in your portfolio, especially for medium and long-term wealth accumulation.
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.
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