How CMA can support real estate funds

Kenya has few real estate funds compared to developed markets. Its only listed real estate fund is Fahari I-REIT, which is regulated by the Capital Market Authority (CMA). 

Real estate is generally considered by many investors to be a safe investment. However, these investments along with property prices typically rise and fall in correlation with economic growth and contraction.

The Covid-19 pandemic brought about an unprecedented economic slowdown that scattered the real estate sector. Some of its negative effects on the real estate sector include; disruption of supply chain networks which resulted in a slowdown of construction activities hence reducing revenues; illiquidity of funds which was attributable to substantial valuation losses, net investor outflows and low cash holdings as the funds invest in illiquid assets; dipping in property prices which severely affected revenue and profitability among others.

Real estate funds and the real estate sector as a whole were adversely affected by Covid-19, but received minimal support from the regulator. In my view, regulators should not only play an oversight role in capital markets but also support industry players and provide a conducive environment.

Attractive investment ventures

The regulator should be at forefront in providing leadership in such exceptional circumstances, given investors in turbulent times are most likely to trust a third party such as the regulator. Statements assuring the public that actions taken by issuers of real estate securities, if in line with international best practice, are in their best interests in the circumstances show a regulator in tune with the prevailing circumstances and ready to support the capital markets.

It is key that the regulator is always concerned about the operational resilience of funds during exceptional circumstances such Covid-19, regardless of whether they are within their regulatory ambit or not. In Kenya, as at 2021, Fahari-I-REIT, the only listed real estate fund, has a market capitalization of $11.6 million while South Africa’s REITS have a total market capitalization of $13.4 billion. This shows that real estate funds’ growth in Kenya remains muted compared to developed markets. 

Moreover, despite real estate funds and REITs being attractive investment ventures owing to their high returns and ability to beat inflation, their uptake in Kenya remains quite low. The regulator should adopt proactive and accommodative regulations for the purpose of creating an enabling environment for real estate funds’ success in order to inspire investor confidence and stimulate growth. 

The real estate sector and real estate funds also go a long way to promoting economic growth and development through development of infrastructure and promotion of the housing agenda, in addition to creating employment. With Kenya facing a housing shortage of two million units, 250,000 units need to be built annually, and the best way to provide funds to plug the deficit is through capital markets and real estate funds.

Mr Wamayuyi is an economic researcher. [email protected]