Are real estate investment trusts viable?

Real Estate Investment Trusts (REITs) were conceived with the goal of giving “regular” people access to income-producing real estate investment in a way that attempts to combine the best attributes of real estate investment with stock-based investment.

Imagine owning shares in an enormous mall or skyscraper or stadium complex. REITs make it possible for one to collectively invest into acquiring, constructing, and/or developing real estate. In the simplest of terms, the idea behind REITs is real estate can have its shares or interest traded publicly on the stock market just like one would with stocks and other securities.

The phenomenon of REITs has its origins in the American real estate industry as way back as the 1960s.

In Uganda, the legal basis of these investments is the Collective Investment Schemes (Real Estate Investment Trusts) Regulations, 2017 (the “REIT Regulations”) made by the Capital Markets Authority (the “CMA”) under the Collective Investment Schemes Act, 2003. The REIT Regulations provide a regulatory framework for property owners to raise capital using their existing properties and for those seeking to acquire real estate and undertake development as a collective scheme.

Under these laws, investors may set up their REITs by registering without necessarily listing them to be traded publicly on the stock exchange. However, investors may also list these REITs as new securities that allow institutions and individuals to invest in real estate, and earn dividend yields.

The law in Uganda envisages two kinds of REIT schemes; the D-REITs, and the I-REITs. While, D-REITs are primarily set up for developing and constructing real estate projects, the main purpose of I-REITs is long-term investment in income-generating real estate projects. The latter type allows investors to pool money together and through the trust scheme, inject that money into a real estate project from which they may earn income, without having to develop or construct the real estate from which they seek to benefit.

The main requirement for the establishment of REITs is a minimum transaction value of Shs9 billion (approximately $2.4 million) and a minimum of seven investors. The law also requires issuers of REITs products to pay a minimum of 80 percent of profits earned to investors.

For the ordinary Ugandan, these requirements may seem steep yet Uganda requires policies that direct its real estate industry towards vertical developments as opposed to the horizontal sprawl that currently dominates Uganda’s real estate landscape. For a country with a housing deficit of more than 2.4 million housing units, and whose available land for development is dwindling, the unspoken benefit from having collective investment schemes putting together a sizeable amount of capital to develop real estate on a large scale, cannot be downplayed.

REITs have delivered on their promise of diversifying and decentralsing investment in the USA and most of the developed world. Despite the existance of a legal framework for REITs in most sub-Saharan African countries, these schemes have not taken off.

This may be attributed to the lack of knowledge among industry players, coupled with a lack of investor enthusiasm. 

Despite those challenges, REITs can prove valuable as part of the nation’s toolkit to develop its real estate sector and diversify its investment portfolio. Income earned from collective investment schemes is exempted from taxation as long as it is paid out to members. Earnings from REITs are exempt from income tax since they are classified as collective investment schemes.

The author Alex Matovu is a partner at Sigmum Advocates.