Kenya Plans Derivatives to REITs to Boost Trading Volumes

Kenya’s bourse, East Africa’s largest, plans to introduce derivatives and real estate investment trusts after equity trading volumes declined, according to the financial-markets regulator.

The Capital Markets Authority will probably approve the introduction of futures products, with a focus on interest-rate and foreign-exchange derivatives, and asset-backed securities by December, Paul Muthaura, the regulator’s acting chief executive officer, said. Exchange-traded funds may be started next year, he said. The FTSE NSE Kenya 25 index has gained 24 percent this year, with the nation’s main stocks gauge the third-best performing in Africa after Ghana and Nigeria.

“The new range of products will deepen the market,” he said in an interview in Nairobi, the capital, on July 8. “Providing new investment opportunities will attract more foreign investors looking for a variety of investment options and allow local investors to spread their investment and tap into new sources of raising capital for projects.”

Kenya’s Nairobi Securities Exchange, which trades stocks and bonds, is sub-Saharan Africa’s third-biggest bourse and its market capitalization is less than a 20th the size of South Africa’s and about a quarter of Nigeria’s.

The volume of stocks traded in Nairobi fell to 5.46 billion in 2012 compared with a record 7.55 billion in 2010 and 5.72 billion in 2011, data provided by the exchange show. Almost 46 billion shares were traded on South Africa’s FTSE/JSE Africa All Share index last year, according to data compiled by Bloomberg.

‘High Potential’

The total value of bonds traded in Kenya last year was 1.14 trillion shillings ($13 billion), according to the exchange. That compares with 2.18 trillion rand ($216 billion) in South Africa, according to Bloomberg calculations based on data provided by the Johannesburg Stock Exchange.

“There is high potential in raising funds from institutional investors, foreign investors and high net worth individuals through the introduction of these new products,” Kenneth Kaniu, chief investment officer at Nairobi-based Stanlib Kenya Ltd., a unit of Standard Bank Group Ltd., with 170 billion shillings under management, said by phone.

Three investment funds have applied to list REITs, Muthaura said, without identifying the companies. REITs are companies that have property-linked assets and pay out most of their income to investors through distributions. The South African REIT Association was started in May after six years of talks to create regulations for the industry, which is set to become the world’s eighth largest REIT market with 26 companies, according to its website.

Institutional Investors

“The REITs will target institutional investors and high-net-worth individuals with a minimum of 5 million shillings per unit to ensure sufficient funds are raised within the shortest time,” Muthaura said.

Housing Finance Co. Ltd., Kenya’s only publicly traded mortgage lender, said last week it wants the government to exempt REITs from paying tax on capital gains. Housing Finance plans to have a stake in REITs as a manager, land owner and property developer as well as trustee, serving as a custodian of assets owned by a trust. Centum Investment Co., Kenya’s largest publicly traded investment group, may also list a real-estate project as a REIT, Nairobi-based Business Daily newspaper reported last year.

The exchange will introduce two classes of REITs. One will focus on existing commercial properties earning rental income and minimum fund size of 300 million shillings. The other will target properties under development with more than 100 million shillings in capital, Muthaura said.

Commodity Instruments

The proposed futures and derivatives exchange will also include commodity instruments, Muthaura said. Regulations for the market will be ready by next month, he said.

The introduction of asset-backed securities will help fund power, water, rail and road projects in Kenya, Muthaura said, without providing details. Kenya’s government has budgeted to spend 442 billion shillings on infrastructure in the fiscal year to June 30, 2014.

The regulator said July 8 it plans to introduce exchange-traded funds and is seeking a consultant to develop regulations. Unlike a mutual fund, the shares of which are priced daily after the end of each trading session, an ETF is listed on an exchange where it is bought and sold throughout the day.

“The new investment instruments will provide an opportunity to diversify investment portfolios,” Vimal Parmar, the Nairobi-based head of research for Burbidge Capital, said by phone yesterday.

Regional Platform

The authority is also in talks with Tanzania, Uganda and Rwanda, who are members of the five-nation East African Community, about providing a platform for businesses to raise capital in various markets simultaneously, Muthaura said. Burundi, the fifth member, doesn’t have a capital market.

“We are planning to co-ordinate approval process allowing businesses to issue multi-currency debt instruments,” with one such application already being processed, Muthaura said.

The FTSE NSE Kenya 25 Index gained for a sixth day today, climbing 0.5 percent to 158.66.

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