Uganda’s capital markets regulator is pushing for more people to take up real estate investment trusts – a financial instrument that provides units of ownership in real estate assets to investors – to speed up sale of new buildings and widen investment choices for fund managers.
“There are about 25 real estate properties available on the local market worth $10 million per unit and we need one of them to list before the Reits segment takes off,” said Capital Markets Authority chief executive Keith Kalyegira.
Uganda’s Reits market regulations, gazetted in September 2017, provide for income-based products that rely on rental fees and sale of real estate to generate revenue for investors.
But, development-based Reits – financial instruments that allow investors to mobilise money from the capital markets for funding construction of commercial buildings — are not covered in these regulations, according to CMA officials.
The Reits regulations contain provisions for transaction fees of between three per cent to 4.5 per cent of the value of any product issued on the market; a minimum transaction value of Ush9 billion ($2.4 million); a minimum of seven investors and also require issuers of Reits products to pay a minimum of 80 per cent of profits earned to investors.
A minimum of 25 per cent of the volume of Reits shares must be reserved for the free float — a basket of shares or units of a listed security available for sale on a trading platform.
Approvals for issuing Reits will carry a 35-day turnaround time, in line with the CMA customer service charter.
“The tax exemption offered on incomes earned from Reits has been in place for more than 10 years and remains attractive to investors,” said Mr Kalyegira.
Under the Reits model, real estate developers are allowed to sell units or shares in a commercial building or a set of real estate properties to investors through the financial markets in a bid to recover their capital quickly.
Experts say the Reits model also offers more competitive pricing for commercial premises due to access to a wider pool of investors and aggressive financial valuations.
On the other hand, local fund managers could benefit from new opportunities and diversify their investment portfolios in a narrow market environment.
While listed shares, Treasury bills and bonds, and fixed deposits offer convenient options for fund managers in the Ugandan financial market, a fairly small pool of available financial securities with little variety has complicated matters for investors seeking to diversify their portfolios.
Besides Reits, other financial derivatives like commodity futures offer good alternatives for investors in the capital markets.
“We need a bigger pool of viable, high value real estate properties in order to absorb projected demand from fund managers,” said Genesis Africa Investment Management Ltd general manager George Mulindwa.