The Capital Markets Roundtable for Kenya (CMRK) has reviewed and analyzed the Capital Markets (Real Estate Investments Trusts) (Collective Investment Schemes), Regulation 2013 and have come up with a number of proposed amendments below, which in our view, their adoption will promote the growth of the REIT industry and the capital markets in general
| No | Regulations | Area of Improvement | Conceptual Issues/Further comments | Recommendation |
|---|---|---|---|---|
| 1 | Regulation 27(1)(b) | An offer or issue of REIT securities in a D-REIT shall only be offered in minimum subscription or offer parcel of five million shilling | The minimum subscription amount is quite high given that the median income in Kenya is Kshs 50,000. Additionally, the high subscription rate brings about an over-regulation for D-REIT as it is a restricted offer that can only be offered to professional investors.The over regulation will likely curtail the growth of D-REITs as it will only be affordable to high net worth investors and it may lose its appeal to the other investors. | While noting the sophisticated nature of the funds, we recommend a reduction in the minimum subscription to Kshs 100,000 from Kshs 5 million.This will increase the uptake of REITs as more investors will qualify to purchase the units as it will be more affordable to Kenyans |
| 2 | Regulation 39(2)(b) | The Authority may require the removal and replacement of the trustee or the REIT manager, if it reasonably believes that the affairs of the scheme are being or have been conducted in a prejudicial manner in the interest of the REIT security holders and investors and contrary to the regulations or any other written law | This indeed is a sanction introduced in the proposed regulations, which appears to go way over and above the sanctions provided for in Capital Markets Acts Section 11(3) cc which is very clear on duties of the Authority to impose sanctions for the breach of the Capital markets act or non-compliance with the Authority requirements. The authority can only impose sanction for breach of the provisions to the capital markets acts and regulations | We recommend the deletion of Regulation 39(2)(b) as it goes against the provisions of the capital markets acts |
| 3 | Regulation 44(2)(d) | The trustee shall have a minimum issued and paid up capital and non-distributable capital reserves of at least one hundred million shillings | The high capital requirement essentially limits the eligibility of trustees to banks as only banking institutions qualify with such high minimum requirement. This is ten times higher when compared to the requirements for pensions corporate trustees which is ten million shillings | Expanding eligibility criteria from the current status quo where by only a few banks are eligible to be Corporate Trustees, to include any company with a minimum issued and paid up capital of Kshs 10 million shillings, and has the sufficient and necessary financial, technical and operational resources and experience, will lead to increase in the number of corporate trustees. This will in return lead to a more competitive environment that will ultimately lead to more innovations in terms of product development and better service delivery in the capital markets |
| 4 | Regulation 45 | The duties of trustee and any secondary disposition trustee | The duties of the Trustee are quite hefty to be done by only one institutions. In the worst case scenario, when there is no REIT manager according to Regulation 45(3)(j), the trustee will act as the Trustee, Custodian, REIT manager and administrator of the scheme. This regulation, together with the strict requirement for approval of registration of trustee, will discourage other companies, including banks, that have the capability required not to apply as Trustees | REITs should have a custodian who will do both the duties of the custodian and administration rather that have the trustee do all the duties. This will allow for specialization and in return result to better performance of REITs in terms of governance and compliance. |
| 5 | Regulation 55(5) | Where a real estate investment scheme is, with the approval of the authority, self-managed, the directors of the REIT manager shall be appointed by and may be removed by the trustee | REIT managers are momentous to any scheme as they make decisions, on behalf of investors, where to invest funds. Therefore investors should not be left out in the decision of whether to remove or appoint a REIT manager for a scheme | We recommend that the trustee appoints or removes the REIT manager with the approval of the Authority and investors. In the case of investors, a special meeting should be called to discuss the removal or the appointment of the REIT manager |
| 6 | Regulation 65(14) and Regulation 76(13) | REIT can invest up to a maximum of 10.0% of the total asset value in a wholly owned and controlled company of the REIT manager carrying out real estate activities | This regulation is ambiguous. Does it mean that the REIT can only invest in one company owned by the REIT manager or there is no limit to the number of companies( owned by the REIT manager) it can invest in? | The Regulation needs to be clear to prevent any future confusion in the due to misinterpretation of this regulation |
| 7 | Regulation 66(1) | Where an investment in real estate has not been completed within 180 days, the trustee shall refund all the monies paid into the fund together with any interest or earnings on the subscribed amount | The reason for not being compliant may be justifiable and the trustee, together with the REIT manager should be given an opportunity to explain the reason for non-compliance to the authority and the investor | The trustee and REIT manager should first be given an opportunity to explain why they are not compliant with the regulation and seek for approval for an extension from the investors and Authority if it is of the view that extending the period is for the benefit of the investors |
| 8 | Regulation 68(1)(a) | Interest in a real estate acquired as an asset by the trustee of an I-REIT shall not consist of partial ownership of real estate | I-REITs should have the flexibility of purchasing real estate properties in installments if it is of the benefit of the investors. This will be beneficial especially in the event the REIT has not been able to raise enough funds from its investors to fully purchase the asset and to remain compliant with regulation 66(1), regulation 71(4) and regulation 71(5) of borrowing | The limitations for partial ownership should be similar to those of D-REITs in regulation 79(4) |
| 8 | Regulation 70 | I-REIT can participate in real estate construction and development | Any investor when deciding on whether to invest in I-REIT or D-REIT looks at the risks involved. The risk averse investors will go for I-REIT and for risk tolerant investors, they will go for D-REITI-REIT engaging in development and construction activities exposes investor to additional risk which may go against the investor interests. | In case an I-REIT would like to engage in real estate development and constructions activities, REIT manager should seek for approval from both the investors and Trustee |
