REITs — public real estate

A Real Estate Investment Trust is a corporate vehicle that owns income-producing real estate and is, by law, required to distribute most of its taxable income to shareholders as dividends. In exchange for the distribution requirement, the REIT does not pay corporate income tax on the distributed earnings — they pass through to shareholders who pay tax at their own rate. The pass-through structure is the entire point: real estate operated inside a normal corporation gets taxed twice (once at the corporation, once at the shareholder); a REIT collapses that to once.

The structural compromise

REIT-qualifying status comes with rules. In the US (the most-developed REIT regime, on which most others including Kenya's are modelled), a REIT must:

• Derive at least 75% of gross income from rents on real property, mortgage interest on real property, or gains from the sale of real property
• Have at least 75% of total assets in real estate, mortgage loans, cash, or government securities
• Distribute at least 90% of taxable income as dividends each year
• Be widely held — at least 100 shareholders, with no single shareholder owning more than 50% (the 'five-or-fewer' rule)

Kenya's framework, established by the Capital Markets Authority under the Real Estate Investment Trusts Regulations 2013, runs on similar logic: 75% income-from-real-estate test, 80% asset test, 80% distribution requirement, minimum free float for listed I-REITs (Income REITs).

Why FFO is the right earnings number

Look at a REIT's income statement and you will see depreciation taking a large bite out of net income. Buildings depreciate over 30–40 years under accounting standards, so a REIT that owns a billion of real estate is reporting tens of millions of depreciation every year. But real estate doesn't actually depreciate in the way a piece of machinery does — well-maintained buildings appreciate over decades, with the actual wear-and-tear covered by ongoing maintenance capex. Subtracting accounting depreciation from net income produces a number that materially understates the true cash earning power of the building.

Funds From Operations (FFO) is the REIT industry's fix. FFO adds depreciation back to net income (and also excludes gains and losses on property sales, which are one-off rather than recurring).

  FFO  =  Net Income
        +  Depreciation & Amortisation on Real Estate
        −  Gains on Property Sales  (+ losses if any)

  AFFO  =  FFO
        −  Recurring Capital Expenditure (maintenance capex)
        −  Straight-lining of Rent Adjustment
        ± other non-recurring items

• FFO — Funds From Operations. The REIT industry's preferred earnings measure. Removes the distortion of accounting depreciation. The number you'd use for a P/FFO multiple comparison.
• AFFO — Adjusted FFO. The cleaner, more conservative number. Subtracts recurring maintenance capex (real cash spent every year to keep the buildings in their current condition) and adjusts for straight-line rent recognition (an accounting convention that smooths rising-step rents into a flat average). AFFO is the closest a REIT gets to 'free cash flow available for distribution'.
• Net Income — Reported earnings. For a REIT, contaminated by depreciation. Don't use directly for valuation.

Valuing a REIT: two complementary lenses

Most REITs trade on a P/FFO basis the way regular stocks trade on P/E. Typical ranges: US REITs 15-20× forward FFO in normal markets; specialty REITs (data centres, healthcare, towers) can trade 25-35×; legacy mall REITs sometimes 8-12×. Kenyan I-REITs trade at structurally lower multiples reflecting market illiquidity and small float.

The second lens is NAV — Net Asset Value. NAV is the sum of the market value of every property the REIT owns (typically valued by quarterly cap-rate appraisals on each asset), minus debt, divided by share count. Then you compare the REIT's market share price to its NAV per share.

  REIT NAV per share  =  ( Σ market value of properties
                          − total debt
                          − preferred equity )
                        ÷  shares outstanding

  Discount to NAV     =  ( NAV per share − Market price ) ÷ NAV per share

  When market price < NAV  →  trading at a discount
  When market price > NAV  →  trading at a premium

Discount-to-NAV is informative because it tells you what the market thinks of the management team and the asset values. A REIT trading at a 25% discount to NAV is the market saying either 'we don't believe the appraisers' or 'we don't believe management will realise this NAV through operations'. Activist investors look for persistent NAV discounts — buy the REIT, force a liquidation or break-up, capture the closing of the discount.

The two NSE-listed REITs

Kenya has two operating listed REITs as of 2026, both small but instructive. The story is the asset class trying to find its product-market fit in a market without deep institutional demand and with structurally low free-float liquidity.

• ILAM Fahari I-REIT — listed 2015. ICEA LION Asset Management is the manager. Diversified income property (largely retail and office in greater Nairobi). Market cap historically ~KES 1-2bn, well below its underlying NAV, reflecting a persistent investor scepticism on whether the management can realise the appraised values. Dividend yield 8-12%. The Kenyan example of a small REIT trading at a deep discount to NAV — uninteresting as a pure income vehicle, interesting as a NAV-discount-narrowing play if catalysts arrive.
• Acorn Student Accommodation REIT (ASA D-REIT and I-REIT) — listed 2021. Acorn Holdings is the sponsor; the underlying assets are purpose-built student housing (PBSH) under the Qwetu and Qejani brands, serving universities across Nairobi and beyond. The D-REIT (Development REIT) funds new buildings; the I-REIT (Income REIT) owns the stabilised income-producing ones. A sector-specialist REIT, much more institutional in flavour than ILAM. Dividend yield ~7-9% on the I-REIT; targeted IRR mid-teens on the D-REIT. Notable as the first scaled, professional-grade Kenyan REIT product.

Why African REITs matter at all

A retail Kenyan investor has very few ways to put KES 50,000 to work in real estate. Direct ownership is impossible at that size; private real-estate funds typically have minimums of KES 5-10m; a REIT share is the only public-equity wrapper. Even if today's REIT market is small and illiquid, every working REIT widens the access pool for retail capital into the asset class. Watch the cumulative free float across listed Kenyan REITs as a leading indicator: when total free float crosses KES 50bn (vs ~KES 10bn today), the institutional follow-on demand inflects, the discount to NAV compresses, and the market gets interesting.