Wednesday, May 30, 2012

The Kenyan Government, in response to this, has invested heavily in infrastructure development. In addition, the Government has taken steps to improve the legal and regulatory framework in key sectors of the economy.

Presently, Kenya does not have a formal framework that allows for efficient financing of large real estate developments, other than the usual mortgage financing.  Real estate developers have resulted to entering into joint ventures of various forms, in order to efficiently finance their development projects.

However, as these joint ventures are not specifically designed for real estate projects, they create significant limitations for developers and potential investors.  These limitations include tax inefficiencies and increased development costs.  In addition, it is not uncommon to have disputes between the joint venture partners.  The disputes lead to delays in delivery of the real estate products and also negative publicity of the real estate project.

In recognition of the significant growth in real estate sector of the economy and the need to provide a framework for financing real estate investment projects in Kenya, the Kenyan Government proposes to introduce a framework for real estate investment trusts (“REITS”) in Kenya. In line with this, the Capital Markets Authority (“CMA”) has been mandated to develop REIT regulations.  In addition, the Finance Bill 2011 proposed various amendments to the Income Tax Act that are meant to lay a suitable tax regime for REITS in Kenya.

What Are Reits

Broadly speaking, REITS are regulated investment vehicles that enable collective investment in real estate. Investors, both retail and corporate, are allowed to pool their funds under the umbrella of the REIT and then engage in real estate projects.

Based on recent public participation in initial public offers and bonds (including Government bonds) at the Nairobi Securities Exchange, we would expect the introduction of REITS to attract significant public participation, thereby providing large sums of capital for real estate projects.

Proposed Reit Regulatory Framework

In the last quarter of 2011, the CMA engaged various stakeholders in consultations on the REIT framework, culminating in the preparation of a discussion paper setting out key elements of the proposed framework.  These key elements will still undergo further consultation before an agreement is reached and draft REIT regulations are published.

Stakeholders have proposed the establishment of two types of REITS, namely, the Income REITS and the Development REITS.  The key distinction between these two REITS is as follows:

  • Income REITS would generally be permitted to invest in income generating real estate products, in the form of rent receivables and similar income.
  • Development REITS would generally be permitted to invest in property development and construction projects.

There have been proposals to have Development REITS converted into Income REITS once the development has been completed.

Stakeholders also noted that there has been increased consumer demand for Islamic investment products. In line with this, stakeholders proposed for a framework that establishes REITS that are compliant with Sharia law.

Proposed Tax Treatment of Reits

The Finance Bill 2011 proposed various amendments to the Income Tax Act.  These amendments seek to have income generated by REITS exempt from income tax (presently 30%). It’s important to note that the proposals to amend the Income Tax Act have been made prior to the creation of the REIT regulations.

It has been suggested that ideally, the exemption from payment of income tax should only apply to income that has been distributed to unit holders and not all the income generated by the REIT. This proposal is meant to incentivise REITS to distribute as much income as possible to the unit holders.

However, it would appear that the income tax exemption for REITS will not be automatic and each REIT would have to apply to the Commissioner of Income Tax for exemption from income tax. Proposals have been put forth to have the income tax exemptions as automatic provided the REIT has been registered by the Capital Markets Authority.


We expect the draft REIT regulations to be released in the first half of 2012. It will be interesting to see whether the proposals made by stakeholders will be taken on board in the final regulations to be published. If properly drafted, REIT regulations are expected to revolutionise the financing of real estate projects in Kenya and spur further growth in the real estate sector.