Personal Finance

Building Your Portfolio: Investing in Real Estate

“Buy land, they are not making any more of it”.

These are the words by American writer, publisher and entrepreneur Mark Twain.

It is quite a simple concept, but one that holds a hard truth- land is a limited resource and as the population of the Earth increases, so will the demand for land (more land needed for housing, farms and industries).

The economic principal of increased demand in the face of limited supply shows that prices of that commodity can only go one way, and that is up.

Real estate remains to be the golden child of the Kenyan investment scene. Beside all the joys and scams that befall this asset class, it is the favourite option amongst local investors as evidenced by the many adverts on TV and radio showcasing the lucrative deals on land and properties.

Real estate is already a well-known and discussed, so this article will probably be shorter than the others, but let’s cover the basics.

What is real estate?

It is simply the land, property and rights to the property (both above and below the ground) you enjoy from investing in the asset class.

It is broadly categorised into four types-

  1. Residential real estate- that is the homes we live in and rent out. Apartments, townhouses, mansions and bedsitters all fall under this category.
  2. Industrial real estate- this is property that is used for manufacturing and warehousing. All those factories you see along Jogoo Road, Kwa Njenga and Imara Daima are all industrial properties and we also have special zones like the Athi River EPZ which are designated for manufacturing firms.
  3. Commercial real estate- this covers all other business types like the shopping malls, offices, hotels and schools.
  4. Other land- This option is the farmland and undeveloped plots that people are using for capital appreciation. It also includes land for mining, game parks, and those on which transport infrastructure sits on.

So there are many types of land, but how can we get exposure to its returns in our portfolio?

Well, there are three ways of investing in real estate in Kenya:

  1. Buying a property

This is the very much obvious option that many aspire to have in their portfolios. Having a piece of land or a rental property is the dream of many Kenyan as it has many advantages like the following:

  • First and foremost, the peace of mind that comes with knowing you have a property that you can always fall back on should any unfortunate event take place in your life
  • A property that you can rent out will provide a passive source of income which contributes greatly to one’s financial freedom
  • You have a physical asset which usually appreciates in value as compared to 1’s and 0’s on a screen in the form of shares or money market instruments that you cannot physically touch, and have fluctuating prices
  • Inflation- Rental prices usually move in tandem with costs of living, and the property prices also increase as the economy grows so you can have a peace of mind that your standard of living will not be decreased in times of rising prices
  • The prestige and pride that comes with owning a property

However, there are some issues with this way of thinking

  • This option remains out of reach for many due to the skyrocketing prices of property, especially in Nairobi
  • Getting financing to buy a house is also more difficult as high interest rates and collateral requirements make it unaffordable for most

Regardless, buying a property in Kenya has become a simpler process with many estate agents operating in a very active market. One must however carry out extensive due diligence before buying a property as there are very many scams.

A property is great to have in your portfolio for the many reasons above but buying one outright as we have seen, is usually out of reach for many so let’s take a look at a more affordable option;

  1. Investing in as a group

This is when your chama decides to use the monthly contributions you give towards buying a rental property or some land to put up some housing units, for example.

This gives you exposure to the real estate benefits as you will receive a share of rental income, but also ensures lower risk as you invest with others.

This is a great option for those who may not have the outright millions to buy a plot in Kitengela as banks are more willing to finance chamas than individuals so you may realise your dream of owning a property much faster this way.

However, this option also comes with its drawbacks as the management of such an investment group would need to be well co-ordinated otherwise you might lose your investment as seen in the many legal cases against saccos in the news. We shall not mention names haha!

If you do not have the money for an outright purchase or are not in a chama, there is one last option. An interesting product you can find on the Nairobi Securities Exchange called a REIT. Let’s find out what it’s all about.

  1. REIT’s

This stands for Real Estate Investment Trusts.

A REIT is when a company pools funds of investors to buy and manage rental properties.

You can buy and sell them like shares on the stock exchange like the NSE as mentioned before and they are a regulated product, meaning it is a much safer investment as the government monitors the company’s operations.

It is similar to a money market fund in the sense that it is professionally managed, but the main difference is that it does not invest in shares or bonds, but in properties instead.

The benefit of such is that you can get exposure to real estate with as low as KSh 1000. Each unit currently trades for about 10 bob and you can buy a minimum of 100 units. Ideally, they pay out dividends from the profits the managing company makes from operating the rental properties and you can also enjoy a profit in the case the unit appreciates in value.

The only REIT we have so far on the NSE is called the Stanlib Fahari I-REIT (standing for Income REIT) and it has one key advantage above other types of real estate investments- it is tax free! All income generated and distributed by the REIT is, by law, exempt from tax so you have more in your pocket at the end of the year.

Other benefits are that it is on the exchange, meaning you can buy into or sell it quickly when you need cash (liquidity). This also means you bypass the tedious process of selling a house. It is also approved and monitored by the CMA and is invested in real estate, meaning your portfolio will be diversified.

Buying the I-REIT is as simple as contacting your stockbroker or placing an order online, and it is on the same platform as the stocks on the NSE, so you do not need to get another CDS number, so if you have an account with a broker, you can already get started.

That being said and done, real estate is a great way to diversify your portfolio as it does not correlate in terms of returns with other classes, and protects you from inflation. Even if you don’t have the cash to buy a whole house, there are other options for you to get exposed to the returns of the sector so you have no excuse to get started!

So I hope this has been of value to you and you can get started investing in real estate.

Please feel free to share any of the experiences you have had with investing in property in the comment section below, and as always, thank you for reading!

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