Investing in high income-generating real estate needs a solid understanding of fundamental concepts of finance relevant to real estate, deep knowledge and the ability to appraise and identify property latent value, as well as critically evaluate decisions to model outcomes with a clear identification of their uncertainties.
This is in addition to sophisticated management expertise, the inherent challenges of real estate being capital intensive and highly illiquid.
Unfortunately, this is what we, as individuals, usually lack, yet, owing to the nature of the real estate, we are constantly drawn to investing in it, especially in an economy like ours where the capital markets are underdeveloped.
As an individual, a property might not be a practical investment for being far out of reach concerning the level of our incomes. This is partly why we have seen an exponential growth of investment clubs because they afford us an excellent foundation for investment ventures that we can undertake as a group by pooling resources and benefitting from shared risk and responsibility.
But most investment clubs eventually fail due to various reasons among which include lack of a clear investment objective, inability to develop detailed financial models tailored for specific projects, bureaucracy in decision making, leaders having to juggle between club activities and their pursuits, lack of technical oversight, etc. These should be the motivating factors for many of the investment clubs to work towards transitioning into an Income Real Estate Investment Trust (i-REIT).
An income REIT is a regulated investment vehicle that enables collective investment in real estate, where investors pool their funds and invest in the REIT to primarily earn income from real estate, as beneficiaries of the trust. REITs operate an easily understandable business model. They own real estate from which they generate income, which is then paid out to shareholders. The stockholders of a REIT earn dividends without actually having to buy and manage the property so it is technically a stock, only in the form of real estate assets.
In Uganda, REITS are provided for under The Ugandan Collective Investment Schemes (Real Estate Investment Trusts) Regulations, 2017 (the “REIT Regulations”) by the Capital Markets Authority (the “CMA”).
REITs are managed professionally under strict governance requirements. A trustee, REIT manager, or an auditor is liable for any loss, damage, or depreciation in the market value of the assets in which the scheme is invested where such loss, damage, or depreciation arises from that person’s breach of their fiduciary duties or obligations; failure to exercise due care and diligence in the discharge of their functions; negligence whether professional or otherwise; or wilful default by that person’s agents, employees or associates.
The investment entry cost into A REIT isn’t prohibitive hence gives individuals a chance to invest in quality property that could have otherwise been unaffordable, allows one to liquidate very fast, offers reasonably stable dividend income and long term capital appreciation with no management headache, while simultaneously offering principal capital preservation because the capital markets regulations, oversight, and reporting frameworks promote transparency. REITs can also have the capacity to create a large diversified portfolio that may be comprehensively hedged to optimally protect against interest rate, currency, and commodity price risks in the most efficient way, through accredited and regulated financial intermediaries.
REITs have risks, for example, market risk (the stock prices generally reflect investors’ confidence in the economy, the property market, the REIT management, etc.), refinancing risk (they distribute a large amount of their income to unit holders, so they may not have the ability to build up cash reserves).
By and large, however, REITs harnesses the advantages of real estate while at the same time mitigating against their risks. Therefore, driving well researched strategy of any investment club into transitioning to a REIT should be a part of the conversation for any savvy investment club.