The success of real estate investment trusts (REITs) in South Africa, where the market is currently valued at $16.1bn, has prompted a number of other countries, including Kenya, Morocco and Rwanda, to introduce REIT legislation of their own. 

According to Nicole Paige, Partner, Linklaters, REITs have the potential to address many of the difficulties, which the African real estate market creates for more traditional fund structures.

“To begin with, many jurisdictions (including South Africa) allow REITs to be listed – a feature which is sought after by both fund managers and investors for a range of reasons,” she said.

“For example, one practical effect of listing is that the value of each unit in a REIT is dictated by market forces, rather than by professional property valuations (which are based on a multitude of factors and can be difficult to evaluate in volatile, immature markets),” she added.

Paige said this offers greater transparency and certainty for investors, and also provides fund managers with plentiful evidence about which types of properties are most attractive to investors (this, in turn, offers a firm, quantitative foundation on which managers can market their fund strategies).

“Listed REITs also offer improved liquidity and exit opportunities to investors; who, rather than being locked into illiquid fund vehicles (with limited transfer rights and a still more limited secondary market), can freely transfer their interests to other market participants (particularly in countries, such as South Africa and Nigeria, where there is an active stock exchange),” she said.

“Moreover, increased liquidity affords additional flexibility to fund managers, because funds initially established as non-REIT closed- ended vehicles may subsequently be converted to REITs and listed,” she added.

According to Paige, this is a significant advantage in the real estate context, where projects – particularly those involving substantial development – can require a commitment extending beyond the lifespan of an ordinary closed-ended fund. 
It also provides a structural solution by which the shorter-term investment horizons of commercial investors can be made compatible with DFIs’ willingness to make longer-term commitments.

“The great promise which REITs appear to offer fund managers and investors is illustrated by the fact that funds utilising this structure have even been established in jurisdictions, such as Ghana, where REIT- specific legislation is yet to be enacted,” commented Paige.