If you want to compare the efficiency of two or more alternative investment strategies, you can use the ROI.
Return on Investment (ROI) is a performance indicator, used to evaluate the efficiency of an investment or compare the efficiency of a number of different investments.
It is a percentage measure of the amount of return on an investment relative to the investment’s cost. Return of Investment (ROI) = [(gains from the investment – cost of the investment)/(cost of the investment)]x100.
For simplicity: Return on Investment (ROI) = (Net Profit from the investment/cost of the investment) x 100
For the Stanlib Fahari I-REIT (now being traded at the NSE), an after tax profit of KES 171.1 million – up from KES 129.4 million in 2016 – (income from leases/rent paid) was made from a capital of KES 2.46 billion.
Stanlib Fahari I-REIT ROI = (171,100,000/2,460,000,000) x 100 = 6.96% in 2017.
At the public offer of the Stanlib Fahari I-REIT on 22.10.2015, clients could buy a minimum of 1,000 units at KES 20,000 (minimum investment). Stanlib declared dividends of KES 0.50 per unit and KES 0.75 per unit in 2016 and 2017 respectively.This means that if you invested KES 180,000 in 9,000 units of the Stanlib Fahari I-REIT in October 2015 and kept the units beyond 2017, you would have received dividends of 9,000 x KES 0,50 = KES 4,500 from 2016 and 9,000 x KES 0.75 = KES 6,750 from 2017 (a total of KES 11,250 in dividends in about 2 years; additionally capital gains may be realised if one sells the units at a profit). However, on Friday 22.06.2018, Stanlib Fahari Income-REIT (FAHR) was trading at KES 11.30 at the Nairobi Stock Exchange (KES 8.70 below the unit price of KES 20 at the public offering).
This means that if you sold your 9,000 units on 22.06.2018, you would have received only KES 101,700 (a capital loss of KES 78,300 over these 2 years). The value obtaining at the stock exchange where units are listed can be used as an indicator of capital appreciation/depreciation at a given time.
If you invested the same KES 180,000 in October 2015 in 365 day T-Bills at 11% p.a. rolled over into 2017 (for 2 years), you would receive KES 19,800 x 2 = KES 39,600 in yields (equivalent to interest/profit). Deducting withholding tax of 15% (KES 39,600 – KES 5,940) leaves KES 33,660 as the net gain. Some investors like self help groups and NGOs rendering useful community service may secure a Kenya Revenue Authority exemption from the witholding tax. Another alternative investment with which one can compare the performance of I-REITs would have been the mobile-phone based M-Akiba bond issued by the Kenyan government in March 2017 at a 10 % coupon (interest) rate and exempt from witholding tax. However, the length of time since the first issue of M-Akiba is too short to facilitate effective comparison.
In the case of I-REITs, investors may not only gain through rental income (dividends/interest) but also through capital appreciation. Real estate appreciates in value over time: in case of Stanlib, these include the Greenspan Mall (Donholm), Signature International and Bay Holdings (Industrial Area). Stanlib focuses on office spaces, light industrial premises, hospitality (hotels/restaurants) spaces and retail spaces (have 6 year leases) with an eye on residential (hostels) spaces (1-2 yr. leases) in future.
Notes:
– Ideally, I-REITS are medium-long term investments (over 2 – 5 years).
– Hypothetically, if Stanlib were to sell all its real estate assets, say after 5 – 10 years and pay out the net proceeds to its unit holders, the actual capital gains/loss for a unit holder with 9,000 units would be calclated thus: Amount received – 180,000 = capital gains/loss.
– Inflation negatively affects the performance of fixed income products.
– Foreign currency fluctuations is an additional factor to be considered for investment capital borrowed in foreign currency (hence one may need to hedge/enter into currency swap contracts).
This brief summary has been brought to you courtesy of InterCurrent (K) Limited.
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