REAL estate investing is one of lucrative business undertakings. However, getting started in real estate investment may not be easy due to the need for a large amount of capital and of course some risk.
Given this challenge, and if you have a passion to be part of the lucrative business and profit from real estate investment, it is advisable to consider other options where one can still participate in the real estate market without necessarily directly buying properties.
The real estate investment trusts (REITs) provide one of the best vehicles for this purpose. A REIT is basically a company formed like other companies and then registered as a Collective Investment Scheme (CIS). In the context of Tanzania, REITs are registered by the Capital Markets and Security Authority (CMSA).
REITs mobilizes financial resources from institutional as well as individual investors and allocates a bigger part of its portfolio ( mostly more than 70per cent) by investing in real estate or related assets such as mortgages bonds.
A typical REIT can have diverse investors ranging from institutional investors such as pension funds, investment companies, SACCOS etc to individual investors or a common mwananchi. Investors invest in REIT by buying Units or simply shares at a given amount.
How are REITs formed A bigger portion of financial resources so raised from institutional and individual investors are invested in either Equity REIT or Mortgage REITS or can even be invested in a Hybrid REIT.
Equity REITs own properties ranging from commercial buildings such as hotels, rental buildings, shopping malls and even hospitals and earns income from rental revenue. Investors in Equity REIT benefit from both periodical dividends as well as capital appreciation of the assets owned.
Correspondingly, the value of the REIT grows as the value of the properties grows. Mortgage REITs on the other hand, invest a bigger proportion of their investment portfolio on instruments meant to provide mortgage loans to borrowers.
Impliedly, investors in Mortgage REIT earn income from interest charged to borrowers during their entire repayment period. Hybrid REITs diversify risk by owning both commercial or residential rental buildings as well as mortgage securities.
By doing so the hybrid REIT is able to diversify risks associated with these two securities. There could be other types of REITs but by far these three types appear to be the major types of REIT in most countries where they operate. Investment Criteria The REITs legislation may differ slightly from one country to another.
However, there are standard criteria that are applicable globally for a company to be recognised as a REIT. Such criteria include being able to invest a bigger portion (at least 70per cent) of its total assets in real estate, derive a bigger portion of its income from property rent or mortgage interest, have a minimum of 100 shareholders, have no more that 50per cent shares or units held by five or fewer individuals and being able to pay at least 90per cent of its income as unit holders dividends.
In essence, REIT are not simply companies that own real estate but they are businesses that provide cash flow to their investors. If you invest in a REIT with a policy to plough back your investment, you can at the end grow your portfolio to the extent that at the end you can purchase individual properties yourself.
REITs in Africa So far few countries in Africa have successfully been able to register REITs starting with South Africa, Egypt, Nigeria, Ghana and Tanzania. Watumishi Housing Company REIT (WHC-REIT) was the first to be registered in East Africa ahead of Kenya’s Fahari-Income REITs which is the latest entrant in the market. WHC-REIT has started with institutional investors namely; PSPF Pension Fund, LAPF Pension Fund, NHC, NHIF, PPF Pensions Fund, GEPF Retirement Fund and NSSF.
At a later stage WHC-REIT will open up for the general public to participate as investors. REITs are similar to other collective investment schemes or mutual funds, except that most assets they invest in are land and buildings rather than stocks and bonds.
Also like mutual funds, REITs are pass-through entities which, in congruence with conduit theory, distribute the majority of income cash flows to investors without taxation at the corporate level. Why invest in REITs The most tangible benefit of a REIT is liquidity and tax advantage as most tax regimes do not tax REITs that distribute more than 90 percent of their profit.
On liquidity, it is much easier to trade in shares of an investment company than to trade in actual bricks and mortar. Like closed-end funds, most REITs are traded on major exchanges.
Other advantages of REITS include professional management, diversification of risk and transparency. REITS are management by fund managers which are firms that comprise of professional managers and persons who know the nature of investment being undertaken.
In connection with this, the industrial regulator monitors operations of REITS in a manner that protects interest of investors. REITs are required to report periodically to the regulator who monitors and analyses the performance REIT. By doing so, REITs investors are potentially prevented from any potential loss.
The fact that REITs can invest in an array of properties ranging from retail space to rental building provide some level of diversification to investors. Furthermore, REITs may also invest a small percentage in the financial markets hence providing a more diversified portfolio to investors.
Transparency if one of the salient features of Collective Investment Schemes including REITS. The value of the Units can be easily tracked by way of following the publication of the Net Asset Value (NAV) of the REIT which is basically arrived at by dividing net assets held by the REIT by number of REIT Units issued at the time of reporting. Regulatory requirement requires REITs to be duly audited annually and to conduct annual investors’ general meeting with a view to reporting on the performance of the REIT.
In connection with all the mentioned benefits, another advantage of REITs and other collective investment scheme worth mentioning is the fact that such vehicles enable an average person to be part of a bigger investment undertaking which otherwise he could not dare to do.
So to speak, a person with TZS 100,000/= may not be able to be invest in a shopping mall alone. In conclusion, collective investment schemes such as REITs offer a new avenue for average people and even low income earners to participate as investors in the real estate markets and can be useful tool in enabling people to serve.
Efforts to spread and acquire knowledge on financial literacy must therefore be the role of institutions such as schools, banks and even collective investment schemes such as Watumishi Housing Company (WHC) and individuals respectively.
With the growing tide of liquidity squeeze, it is not surprising that promoting and encouraging people to build a culture to save small amount of money consistently over a long time may be a powerful tool to enable people to build wealth over time and be able to acquire useful assets such as homes, pay for children education etc.
Dr Fred Msemwa is CEO of Watumishi Housing Company REIT responsible for management of collective investment schemes and provision of affordable homes in Tanzania:fred.msemwa@ whctz.org