By 2020, Acorn’s Qwetu hostels or Purpose-Built Student Accommodation (PBSA) were a proven hit. The developer had broken ground on three properties with a combined capacity of 1,852 beds. Better, occupancy rates were hovering around 90 per cent. Tried, tested, and an A+ grade.
The time was ripe to scale Qwetu’s success, and to do this, Acorn needed long-term sources of funding. The typical run-of-the-mill commercial bank loans, while useful, were a challenge for Qwetu’s needs. Acorn needed something new to sustainably fund is envisioned PBSA portfolio expansion. To do this, the answer lay in Real Estate Investment Trusts (REITs).
But what are REITs? We will use an example to simplify what REITs are.
Imagine Joe wants to invest in a block of flats, shopping malls, warehouses, or even data centres. However, he does not have hundreds of millions to develop these properties, nor the technical or operational experience.
This is where REITs come in. A developer such as Acorn comes and tells Joe, Look, I will construct these properties, sell them, return your money, and add a premium. All you need is a small amount.
But how?
Simple, the developer looks for thousands of Joes and pools their money. The money is housed in a company (REIT). Joe and others get shares in the REIT. The REIT finances the development of the properties.
In the example above, this type of REIT is referred to as a Developer REIT or a D-REIT.
For the developer, in this case Acorn, it can raise funds, put up the properties without the onerous debt payments that come from commercial loans.
Now, imagine if Joe wanted to be a landlord so that he could receive rental income. Similarly, he would face the same challenges of not having enough funds to buy a block of flats in a skyscraper. Again, REITs come to the rescue.
A property owner, such as Acorn, approaches Joe and tells him he can invest a manageable amount and own a rental property. The property owner pools funds from many investors and then sells the rental unit to investors who get a share in the rental property. The investor owns a share in the rental property. This is called an Income REIT or an I REIT.
In both cases, there are laws and mechanisms to ensure that the interests of the investors are taken care of.
The Capital Markets Authority (CMA) must approve any company that wants to raise funds through REITs. Companies or promoters must also ensure they comply with rules such as financial reporting. There are also independent parties, such as trustees, who, among other things, maintain custody, hold, and protect all REIT assets, ensuring they are identified as trust assets and kept separate from other assets. They also make sure the developer does as promised, not build a mall when what was on offer was a hostel.
Shares in the REITs are then listed in an exchange, in this case the Nairobi Securities Exchange (NSE), ensuring that investors can trade in them.
In Qwetu’s case, Acorn launched Kenya’s first REIT in 2021.
Acorn offered investors an opportunity to invest in REITs, not one but two. The first was a D-REIT for developing student hostels, while the second was an I-REIT offering investors income from completed units. For every shilling invested, 30% was allocated to the D-REIT and 70% to the I-REIT, effectively combining the two investment opportunities.
So in February 2021, Acorn hit the market offering REITs at a KES20 offer price per unit. The minimum investment was set at KES20 million.
The D-Reit raised KES 1.4 billion while the I-Reit raised KES 641.5 million for a combined KES 2.1 billion, and the units were subsequently listed on the Nairobi Securities Exchange (NSE).
At a minimal price of KES 20 million per investment, the opportunity was skewed towards institutional investors and high net worth individuals (HNWIs).
This doesn’t make the case for Joe, but Qwetu had a plan for retail investors such as Joe.
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