This archive report was first published on 7 October 2019.
On October 7, 2019, Cytonn, a leading investor manager, submitted a proposal to the Capital Markets Authority (CMA) to register its first Development Real Estate Investment Trust (D-REIT).
The proposed D-REIT aims to raise Ksh.2 billion from the public, which will be used to fund the construction of the first phases of two real estate projects in Ridgeways, Kiambu, and Ruiru.
This move is part of Cytonn's ongoing funding diversification strategy, which seeks to incorporate cheaper financing sources. The company has traditionally relied on private sector funding, which, while easier to access, has been more expensive.
“Cytonn has traditionally relied on private sector funding, which while easier to access, has been more expensive. This has thus necessitated the development of alternative sources of funding, allowing development of institutional-grade real estate at a relatively lower cost, thus maximizing the returns to investors,” noted the company in a statement.
Earlier this year, Cytonn switched from investor and shareholder funding by taking out a Ksh.650 million credit line with the State Bank of Mauritius (SBM), which helped to fast-track the Alma, a Ksh.3.5 billion residential development in Ruaka.
The government has relaxed barriers to investor entry to boost participation in the income-producing real estate investment vehicle. In his proposal to Parliament, former Treasury Cabinet Secretary Henry Rotich suggested exempting REITS from paying income tax, which has been carried forward as part of the 2019 Finance Bill.
REITS/D-REITS are regulated investment vehicles that enable collective investments in real estate, where investors pool their funds and invest in a trust with the intention of earning profits or income.
If successful, the planned D-REIT will help to free up funding pressure on the wealth management firm, which announced the sale of a 20 percent stake to Finland-based Taaleri Group upon its public listing in October 2018.
Like other real estate-based investment firms, Cytonn has been affected by the recent sector slowdown, characterized by subdued property valuations, over-supply of units, and tightening financing conditions.
The company has begun picking one project at a time to mitigate against risks, including the in-completion of projects. The firm will also see an appraisal of its credit rating, which is primarily based on its ability to encompass multiple funding sources.
However, Cytonn is not expected to list the REIT at the Nairobi Securities Exchange (NSE) in the interim, prolonging the drought on the NSE's real estate trust counter, which currently only features the 2015 listing of the Stanlib Fahari i-REIT.
