Attracting Institutional Capital – The rising demand for real estate Investments by Kenya’s Institutional Investors

Predominantly, institutional investors, such as insurance companies and pension funds, have primarily invested in government securities and stocks. This is attributed to the relatively high liquidity in the stock market, and low investment risk associated with the debts market, in comparison to other asset classes.

However, a new trend in the real estate market has increasingly seen institutional investors upping their stake in the property sector, indicating an increasing willingness to weather calculated risks, in exchange for higher returns. According to the Insurance Regulatory Authority, investment in properties account for 23% of general business investments compared to shares at 8%. This is in comparison to 2010, where investment in properties accounted for 10%, while shares accounted for 25%. Increased uptake of investment in properties, is mostly driven by the need for insurance companies, and other institutional investors, to diversify their income streams and reduce overall portfolio risk. This is in addition to the stock market’s increasingly high volatility, low yields and high exposure over the past few years.

According to the Construction Business Review, real estate as an asset class, has over the years differentiated itself as being more resilient than stocks during low growth periods in the economy, while performing better than bonds during high growth periods. This has seen an increased appetite for real estate investments by institutional investors  as evidenced by their capital inflows into the market. Notable projects in the country to illustrate this include, Crystal Rivers Mall by the Safaricom Staff Pension Scheme, Rosslyn Springs by the KenGen Staff Retirement Benefits and the recently unveiled Kileleshwa Mall by Britam Asset Managers.

art1122wideaFor real estate developers, the shift from traditional markets to investment in properties, by institutional investors, presents a welcome opportunity to access real estate finance. This is due to the stunted credit environment currently facing the country, as banks continue to shun investment loans in favour of trade and government securities. Developing the right strategies and practices as a real estate developer, however, remain fundamental to attracting and securing institutional capital.

According to the National Association of Industrial and Office Parks (NAIOP), real estate developers seeking to attract institutional capital should deliberately choose to adopt a strategy that incorporates high quality reporting methods, such as fair value reporting and well developed operational guidelines This might include incorporating guidelines on asset management reporting practices, valuation processes, acquisition and disposition of property, internal controls as well as revenue forecasts, which can be done with the aid of a real estate finance professional. While it might require some effort on the part of the developer, the main objective of developing such guidelines is usually to enable institutional investors to track the progress of their investments, while maintaining a high level of transparency usually required by stakeholders of the institutional investors. This in turn increases the overall attractiveness of a project and provides justification for the investment

In addition to that, developing a solid real estate business plan and a portfolio of successful projects, albeit on a smaller scale, can also go a long way in securing institutional capital. However, institutional investors still remain selective when investing in real estate, often choosing projects with high long-term returns at a lower risk, as opposed to short term ones.