The Capital Markets (Real Estate Investment Trusts) (Collective Investment Schemes) Regulations

65. Eligible investments for an I-REIT and income requirements

Edition: 2023-10-06 · In force

65. Eligible investments for an I-REIT and income requirements

(1)The trustee of an I-REIT may, subject to any limitations which may be specified in the scheme documents and if requested by the REIT manager—

(a)invest directly in eligible real estate in accordance with these Regulations;

(b)invest in eligible real estate assets through investment in an investee company incorporated in Kenya which directly owns the eligible real estate and which is wholly beneficially owned and controlled by the trustee in its capacity as the trustee of the I-REIT where—

(i)the I-REIT trustee has the absolute power at any time to appoint and, without incurring any liability, to remove the directors;

(ii)the trustee of the I-REIT, the company, the directors and the shareholders have entered into a shareholders agreement;

(iii)the REIT manager of the I-REIT is appointed as the manager of the investments of the investee company;

(iv)the Memorandum and Articles of Association of the investee company and the terms of the shareholders agreement limit the objectives of the investee company and the powers of the company and directors and impose the same obligations on the company, its directors and the manager of the trust as if the investee company was an I-REIT and an authorized scheme under these Regulations and was subject to the same obligations and restrictions as are imposed by these Regulations;

(v)the provisions of these Regulations on the carrying out of a valuation, reporting and audit apply to the investee company as if the investee company was an I-REIT and an authorized scheme under these Regulations;

(vi)the investee company invests directly in the eligible real estate and is recorded on the certificate of title or certificate of lease or register as the sole owner;

(c)invest in eligible real estate assets through an investee trust in which the trustee of the I-REIT in its capacity as trustee is the sole beneficiary and has absolute control of voting and right to appoint and remove the trustee of the investee trust and where—

(i)the investee trust is formed under the laws of Kenya as an unincorporated common law trust;

(ii)the I-REIT trustee is also the trustee of the investee trust;

(iii)the REIT manager of the I-REIT is also the manager of the investee trust;

(iv)the terms of the trust deed for the investee trust limit the objectives of the investee trust, the trustee's powers and impose the same obligations on the trustee and the manager of the trust as if the investee trust was an I-REIT and an authorized scheme under these Regulations and subject to the same obligations and restrictions as are imposed under these Regulations;

(v)the provisions of these Regulations on the carrying out of a valuation, reporting and audit apply to the investee trust as if the investee trust was an I-REIT and an authorized scheme under these Regulations;

(vi)the trustee as trustee for the investee trust invests directly in the eligible real estate and is recorded on the certificate of title or certificate of lease or register as the sole owner;

(d)invest in cash, deposits, bonds, securities and money market instruments;

(e)invest in a wholly beneficially owned and controlled company subsidiary which conducts real estate related activities; and

(f)invest in other income producing assets including shares in property companies incorporated in Kenya whose principal business is real estate related or REIT securities in other Kenyan I-REITS:

Provided that the shares or REIT securities are listed on an approved securities exchange.

(2)The requirement for the appointment of a sole trustee shall not be applicable where a secondary disposition trustee is appointed.

(3)The trustee and the REIT manager shall only invest in accordance with these Regulations.

(4)The promoter of an l-REIT and the REIT manager shall propose and specify, in the prospectus or offering memorandum, at least one real estate asset that is already vested in or proposed to be acquired and vested in the trust and for which all legal registration requirements will have been completed within one hundred and eighty days of the closing of the initial offer.

(5)Where—

(a)the promoter, trustee and REIT manager fail to comply with the requirements of paragraph (4) during the intervening period from the close of the initial offer or issue referred to in paragraph (4); and

(b)the registration requirements are not complete and the proposed real estate asset are not vested in the trust,

the funds raised by the initial offer and issue of REIT securities shall only be invested in bank deposits or other liquid investments with a duration not exceeding one hundred and eighty days.

(6)An I-REIT shall invest, within two years of the date of its authorization as a real estate investment trust scheme, at least seventy five percent of the total net asset value in income producing real estate.

(7)The trustee and the REIT manager shall, in complying with the requirements under paragraph (6), ensure that the real estate acquired or to be acquired as an asset of the I-REIT is—

(a)rented on a commercial basis to commercial rent paying tenants;

(b)has good prospects for future net rental income and is competitively located as evidenced by market studies;

(c)free from encumbrances at the time of acquisition except for any charges entered into by the trustee as authorized by the trust deed, the Act and these Regulations; and

(d)in a good state of repair or if requiring redevelopment or capital expenditure, this has been factored into the purchase price as reflected in the–

(i)valuation obtained prior to the acquisition;

(ii)the budget prepared by the REIT manager; and

(iii)disclosures in the report of the structural engineer obtained on the condition of the real estate to be acquired.

(8)Despite paragraph (7), an I-REIT may acquire a real estate which is not fully rented at the time of acquisition where—

(a)the REIT manager reasonably believes that there is good potential to secure tenants within a reasonable period of time at a commercial rate;

(b)any capital expenditure required to be incurred to enhance the real estate and secure tenants would not materially affect the level of distributions or the yield to REIT securities holders; and

(c)the REIT manager has provided a certification for the purposes of paragraph

(d)and (b) to the trustee prior to the acquisition.

(9)The trustee and the REIT manager shall, where the real estate acquired is leasehold, ensure that—

(a)at the time of entering into the lease, the lease has a remaining term of at least twenty five years;

(b)prior to entering into the lease, a certificate by a structural engineer has been obtained in respect of the real estate;

(c)the real estate has been valued as a leasehold; and

(d)the documentation to record the lease or transfer of lease is lodged for registration.

(10)Where a real estate asset is disposed by the trustee of an I-REIT or a new issue of REIT securities has been made, such disposal or acquisition shall not constitute a breach of obligations under paragraph (6) if within a period of one year from the completion of the disposal or from the issue of REIT securities, the trustee on behalf of the I-REIT and at the request of the REIT manager either acquires additional or substitute real estate assets or makes an additional distribution to REIT securities holders so as to reduce its total assets.

(11)Subject to paragraph (12), the trustee of an I-REIT and the REIT manager shall ensure that investments in cash, deposits, bonds and money market instruments are spread across a number of issuers, securities and instruments to ensure that not more than five percent of the total asset value is exposed to any one issuer or institution or to members of the same group.

(12)The restriction under paragraph (11) shall not apply to deposits, bonds or securities issued by or guaranteed by the Government or to deposits with a banking institution licensed in Kenya.

(13)Failure by the trustee and the REIT manager to spread the investments in accordance with paragraph (11) shall not, where the limit is exceeded but rectified within a period of thirty days from the day on which the limit was exceeded, constitute a breach.

(14)The REIT manager may subject to the terms of the trust deed and where not specifically authorized by the trust deed, with the consent of the REIT securities holders request that the trustee of an I-REIT invest up to a maximum of ten percent of the total asset value in a wholly owned and controlled company of the REIT manager carrying out real estate related activities including—

(a)property management;

(b)REIT management;

(c)property maintenance or design or the provision of services to tenants or to the I-REIT;

but shall not include the provision of mortgages or finance.

(15)For the purpose of determining the level of the investment that can be made under this regulation, the percentage shall be calculated by reference to the amount of the proposed investment and the total asset value at the date on which the investment is made.

← Previous provision Next provision →

Source: Kenya Law