Member Article

Introduction 

The Ugandan Collective Investment Schemes (Real Estate Investment Trusts) Regulations, 2017 (the “REIT Regulations”) are the latest initiative by the Capital Markets Authority (the “CMA”) in Uganda. The REIT Regulations provide a regulatory framework for property owners to raise capital using their existing properties and for investors to acquire a part of these properties or for those seeking to acquire real estate and undertake development and construction activities as a collective scheme. 

We set out below the key provisions of the REIT Regulations. 

What is a REIT scheme?

A real estate investment trust (“REIT”) scheme is an arrangement established for the purpose of collective investment by persons in real estate. The persons investing contribute money or money’s worth as consideration to acquire rights or interest to gain benefits from pooling funds and investment in real estate and earn profits or income from the real estate. 

What kinds of REITs are there?

A REIT may be structured either as a development and construction real estate investment scheme (“D-REIT”) or an income real estate investment trust scheme (“I-REIT”). The objective of a D-REIT is to raise funds to acquire real estate and undertake development, construction projects and associated activities, which may include housing projects or commercial projects, to market and sell the real estate and to retain and manage the real estate with the object of earning income from the assets. The objective of an I-REIT is to enable the issuer to raise funds for purposes of acquiring long-term income-generating real estate (including housing, commercial and other real estate), marketing and sale of real estate, and retention and management of real estate assets of the trust with the objective of earning income from the assets of the trust. Although the distinction between the objectives of the D-REIT and the I-REIT appears blurred, the return on the former is on the sale of the property while that on the latter, is on rental income. 

The I-REIT has demonstrated greater success over the D-REIT in other African jurisdictions with a track record in the issuance of REITs including South Africa and Nigeria. The CMA will therefore focus on the promotion of an I-REIT over a D-REIT. 

Establishing the I-REIT 

A promoter may establish an I-REIT by transferring real estate into a trust established under a trust deed. The property would be held in the name and under the control of a trustee, duly licensed by the CMA. 

A promoter intending to establish and issue an I-REIT must apply to the CMA for authorisation to issue the I-REIT. The promoter must present to the CMA:

• draft of the trust deed
• draft prospectus or information memorandum 
• draft management services agreement with the REIT manager
• draft agreement with a property manager 
• valuation reports of the properties to be transferred to the REIT 
• a legal opinion confirming the title to the property 
• a contract with and the report of the structural engineer, and 
• audited financials of the REIT manager and the trustee

The prescribed minimum thresholds 

The I-REIT must have a minimum value of assets of UGX9-billion, with at least seven investors and 25% of the total of the REIT securities being held by persons who are not connected or associated with the promoter or REIT manager. The REIT Regulations provide a lock-in period for a promoter for 12 months. The promoter must maintain an investment of at least 30% of the asset value of the REIT within these 12 months. 

Offer of the I-REIT

Once established and authorised by the CMA, the issuer may offer an I-REIT to either professional investors or to the general public. Where an offer is to the general public, the REIT must be listed on an approved securities exchange. 

Operation and management of the I-REIT

The trustee and the REIT manager are the key players in the operation and management of the REIT. Only a financial institution defined in the Financial Institutions Act or an insurance company defined in the Insurance Act is eligible to act as a trustee. The obligations of the trustee include appointment and supervision of the REIT manager, ensuring that the fund and assets of the REIT are invested as required by the trust deed and protecting the interests of the unit holders. 

A REIT manager must be incorporated and registered in Uganda and must be licensed by the CMA to provide real estate management services. The obligations of the REIT manager include acquisition, management, maintenance and disposal of assets of the REIT, preparation and maintenance of proper accounting records and carrying out all property management functions. 

The trustee and REIT manager have a fiduciary duty and are under an obligation to exercise due care and diligence in the performance their obligations. A trustee or REIT manager is liable for any loss, damage or depreciation in the market value of securities in which the REIT assets are invested where such loss, damage or depreciation arises as a result of a breach of duty and no provision in the trust deed or management agreement can exempt a REIT manager or trustee from such liability.  

Conclusion

There is a general view among key stakeholders that more work needs to be done by government in order to prepare the market (both potential promoters and potential investors) for the issuance of a REIT. There remain some underlying issues with the Ugandan real estate market which, if not addressed, may hinder the successful issuance of a REIT, key among which is the recent amendment to the tax laws requiring rental incomes to be paid in Ugandan shillings. Other key concerns relate to the well-publicised disorder in the management of registration of land, casting some doubts on authenticity of records on land ownership and the lack of industry standards with respect to property valuations. The dismal performance of REITs in Kenya and Nigeria, which are far larger economies with far larger real estate sectors, is discouraging. On the other hand, Uganda is in a unique position to draw lessons from Kenya and Nigeria’s experiences. 

The CMA must continue to lobby for policy changes and sensitise the public to the REIT Regulations, otherwise this law will be added to the list of capital markets laws that have been passed over the years but never applied.