African countries have been long in the gutters of the affordable housing crisis. Among other solutions have been the attempts by governments to provide cheap and affordable housing for all citizens directly. However, the housing demand in many African countries has left many government housing programs out of their depths. Furthermore, foreign investors have had minimum impact citing the unique challenges in the African continent.
Enter Real Estate Investment Trusts (REITs). REITs have been a fairly recent phenomenon in the African real estate scene which explains why the full scope of its applications are yet to be availed.
The REITs themselves are a relatively new phenomenon even by global standards having been in existence only for the past 59 years. However, the novelty of the innovation which was introduced by the US Congress in 1960 is its ability to grant even small investors access income-producing real estate assets. Until then, such assets were the preserve of the opulent players in the economy.
REITs have since spread to over 30 countries including a handful in Africa. In the US alone, the REIT industry has grown to $1 trillion equity market capitalization, nearly a third of Africa’s GDP.
Back to Africa. Surprisingly in Africa, even in countries where REITs have been introduced, the general sentiment about REITs is that of the pre-REITs era in the US. This has generally hampered the uptake of REITs by investors. There are other factors of course but it remains to be seen whether sooner than later there will be a mindset change in the way REITs are perceived by potential investors. The question for analysis however is whether REITs can solve the affordable housing challenge in Africa and how.
REITs are structured to allow investors to invest in portfolios of large-scale properties in different parts of the real estate industry by purchasing shares like they would do with shares of other companies traded over the stock exchange. Furthermore, REITs operate under strict rules and regulations that require them to distribute at least 80%(Kenya) of all income as dividends.
According to Nareit, a global representative body for REITs, the benefits of REITs include access to a diversified portfolio of assets, substantial dividends, valuable liquidity, transparency and competitive performance. The peculiar advantages of REITs is that diversified portfolios subdue the limitations that usually face individual projects. In addition, REITs usually get a good tax deal based on favourable regulations and legislations which also exempt them from capital gains tax and require high rates of profit distribution.
These unique features are designed to help REITs access financing from otherwise reserved investors, yet investors in many African countries are yet to give REITs a warm embrace.
In African markets and true to the structure of REITs, the classical way to integrate afford able housing into the REITs market would be to embed them strategically into the existing REITs, perhaps with government backing. This would be made possible by the distinctive characteristics of residential REITs which according to the Centre for Affordable Housing Finance include the potential for development, stable income, and stable capital value, effective inflation hedging and low rate of obsolescence.
The main challenges with such an approach would be the high housing management costs, taxes, liquidity risks and uncertainty in market dynamics but a comprehensive plan would remove most of these barriers. Well done, residential REITs would promote a culture of quality, affordability and sufficient supply of housing to the citizens.
In addition, residential REITs would stimulate economic development by accelerating the flow of capital into that very crucial sector of the economy and returns to the investors, supposing a wider intake by individuals across the economy.
Case studies abound. In Ghana, Africa’s earliest establishment of a REIT, the returns have consistently exceeded the inflation rate as well as the government note’s benchmark and this even in the absence of proper legislation, limited public interest and liquidity constraints.
In Tanzania, the Watumishi Housing Company REIT has a property portfolio worth $40 million and is 100% focused on residential property with an aim to supply affordable housing. The company has already made steps, supplying units at cheaper prices and has plans to list on the stock exchange this year.
In South Africa, the Indluplace Properties is the country’s first focused residential REIT with a portfolio of 5400 units and a 100% dividend pay-out. Enabling factors include strong market fundamentals, high demand for affordable and well managed rental housing.
For now, the main challenge that would face residential REITs focused on affordable housing would be the risk-reward trade-off between investment and required returns. The problem stems from the fact that the lower the income levels the higher the risk level and the lower the expected returns, making the affordable housing market segment much riskier for investors.
Given the demand for affordable housing in many African markets however, there is sufficient optimism that a mechanism can be worked out to address the needs of both beneficiaries and investors in residential REITs.