Dividends vs. Capital Gains: How REIT Investors in Kenya Make Money

Real Estate Investment Trusts, or REITs, provide a unique opportunity for investors to access the lucrative real estate market without the complexities of direct property ownership. REITs are companies that own, operate, or finance income-producing real estate across various sectors, including apartments, shopping malls, offices, hotels, and increasingly, specialized properties like student accommodation (such as the Acorn Student Accommodation Income REIT in Kenya). 

When you invest in REITs, your returns typically come from two primary sources: dividends and capital gains. Understanding the distinct characteristics and implications of each is fundamental to building a successful REIT investment strategy. 

What are Dividends? 

Dividends are distributions of a company's earnings to its shareholders. In the context of REITs, dividends are a cornerstone of their appeal, primarily due to the special tax status granted to them. To qualify as a REIT, a company must distribute at least 80% of its taxable income to shareholders annually in the form of dividends.  

REITs generate income primarily from rents collected on their vast portfolios of properties. This rental income, after deducting operating expenses, forms the basis of the taxable income that is then distributed to shareholders as dividends. For an income-focused REIT like the ASA I-REIT, stable rental income from student accommodation ensures a consistent flow of funds for these distributions. 

Dividend payouts directly increase an investor's total return. For instance, if you invest KES 100,000 in a REIT and it pays a 5% annual dividend, you would receive KES 5,000 in cash distributions that year, irrespective of whether the share price has changed. This consistent income can be reinvested to buy more shares (compounding your returns) or used as a regular income source. 

What are Capital Gains? 

Capital gains occur when an investment asset is sold for a price higher than its original purchase price. For REIT investors, this signifies an increase in the value of their shares over time. 

While dividends is a cash earning, capital gains are crucial for overall wealth accumulation. They reflect the underlying appreciation of the REIT's real estate assets, driven by factors like rising property values, strategic acquisitions, successful development projects, and efficient property management. A REIT's share price can rise if the market perceives its property portfolio as growing in value or its earnings potential as increasing. 

How Capital Gains Are Realized 

• Market Growth (Unrealized Gains): When you invest in REIT shares and their market value increases over time, you accumulate what's called an unrealized capital gain. This means your investment is worth more than what you paid, but the gain remains on paper as long as you continue to hold the shares. Many long-term investors choose to hold onto their shares to benefit from potential future growth and compounding. 
• Selling Shares (Realized Gains): A capital gain is considered realized only when you sell your REIT shares for a higher price than you bought them. For example, if you purchased a share at KES 50 and sell it at KES 65, you've realized a capital gain of KES 15 per share. However, selling should align with your long-term strategy—not just short-term market movements. 

While it's important to understand how gains are realized, long-term investing often rewards those who remain patient. Holding your investment allows you to benefit from sustained growth, dividend income, and long-term value appreciation. 

Key Differences Between Dividends and Capital Gains 

Understanding these distinctions is vital for effective investment planning: 

In summary, both dividends and capital gains are integral components of REIT returns, serving different purposes within an investor's portfolio. Dividends offer a consistent income stream, making REITs a compelling choice for those seeking regular cash flow. Capital gains, on the other hand, represent the appreciation in the value of the underlying real estate assets and are realised upon the sale of shares, contributing significantly to long-term wealth accumulation. 

A truly balanced investment strategy for REITs leverages the strengths of both. By focusing on REITs with strong, stable rental income for attractive dividends, while also considering their potential for underlying property value appreciation, investors can optimize their total returns. This dual benefit makes REITs a powerful tool for diversification and wealth building, particularly in the Kenyan market, where the capital gains exemption on marketable securities can be very advantageous. 

When considering your next investment move in REITs, look beyond just the yield. Understand how both the consistent dividend payouts and the potential for capital appreciation fit into your financial goals. Partner with platforms like Vuka to explore expertly curated REIT investment opportunities that offer the best of both worlds.