It is important that as a business, we have a long-term sustainable financial strategy that is able to deliver sustainable returns to investors. As such, part of this strategy includes the need to develop appropriate capital structures to finance the development of rental housing.
In the Kenyan context, we will do this by establishing two Green Real Estate Investment Trusts (REITs) under the Kenyan REIT legislation. The Development REIT or D-REIT undertakes all the development work, while the Income REIT or I-REIT purchases all completed and stabilized operational properties from the D-REIT and holds them for the long term.
These two REITs are the most appropriate route for Acorn within the local legislative and legal context for two reasons; REITs are:
Real estate development is exposed to multiple significant taxes – Income Tax of 30 percent on development profits, stamp duty at 4 percent of the value of land and property on sale or transfer, and 5 percent capital gains tax on capital appreciation on sale or disposal. REITs only have a 15 percent final tax on dividends and even this tax is not applicable to the typical REIT investors such as pension and life funds.
Access long-term investors
REITs enable us to access the capital markets’ long term investors, such as pension funds, life, and mutual funds, savings and credit societies (SACCOs), Development Finance Institutions, and retail investors who are the most appropriate long-term holders of REIT securities. Accessing the capital markets and eventually, local retail investors are vital to ensuring the scalability of the business, given the large amounts of capital required over the next ten years.
But what are REITs?
REITs, or real estate investment trusts, are funds that own or finance income-producing real estate across a range of property sectors. These real estate funds have to meet a number of requirements to qualify as REITs. Most REITs trade on major stock exchanges, and they offer a number of benefits to investors.
>REITS provides Acorn the right capital structure that is tax optimized and long-term capital to undertake our affordable rental housing at scale.