We discuss REITs as an investment vehicle for potential stakeholders as well as a possible solution to housing crises and economic growth.
Real estate is often seen as one of the safest investment vehicles. The common saying is that land never depreciates (although the same cannot necessarily be said for property). The issue with real estate investment is that unlike finance instruments like stocks and bonds – in which one can grow a portfolio slowly and incrementally – potential stakeholders can only invest by purchasing land or property outright. This is capital intensive and can dissuade investors, especially those looking to get a short- to mid-term return on investment. This is where real estate investment trusts (REITs) come in.
REITs are companies that own and may operate, income-generating real estate. They own all sorts of commercial real estate from warehouses to hotels, offices and apartment complexes. They pool the capital of investors to purchase and manage properties which generate income through rent or mortgage payments. They pool resources by making it possible for investors to purchase a stake in the trust and as such, earn dividend payments. Thus, they invest in real estate without purchasing, developing, or maintaining any property themselves.
The global REITs market is estimated to be worth around $4 trillion, with the Centre for Affordable Housing noting that up to 44 countries have REIT-specific regulatory legislature – a signifier of an established industry. A few countries in Africa, such as Morocco, Nigeria, South Africa, and Kenya, have significant REIT markets, with asset focus on commercial properties, housing, or a mixture of both.
Nigeria and REITs
Nigeria has one of Africa’s oldest REIT markets, as they were introduced about 15 years ago to the country. The country has three REITs trading on the Nigerian Stock Exchange (NSE): UACN Property Development, a mixed portfolio REIT; Union Homes Real Estate Investment Trust, which specializes in residential properties, and Skye Shelter Fund, another mixed REIT.
Mustard Insights calculation shows that the combined market capitalization of Nigeria’s REITs is about N20.7bn, around $27 million. In contrast, South Africa has nearly 30 REITs listed on the Johannesburg Stock Exchange (JSE) with a market capitalization of nearly $7bn. The intelligence syndication platform, Mondaq, lists three reasons why REITs have not exactly taken off as an industry in Nigeria:
- There is a lack of investor familiarity with REITs; individual investors are simply unaware that they exist. There is little enlightenment through means such as the publication of quarterly or annual financials in finance platforms, or recommendations by stockbrokers.
- There is not a lot of mature and particular regulatory legislation targeted at REITs. This may dissuade potential stakeholders, who might see REIT investments as risky. Some do exist though, such as the Investments and Securities Act, which empowers the Securities and Nigerian Exchange Commission (SEC) to approve, register, and regulate REITs. Other existing real estate regulations include the Nigeria Land Use Act of 1978, the SEC’s Consolidated Rules and Regulations (2013), the Companies and Allied Matters Act 2020, and The Finance Act 2021, although none are targeted directly at REIT regulation.
- There are a lot of difficulties in processing and procuring land titles in Nigeria. The process is very bureaucratic and can take a long time, dissuading potential investors, as land acquisition is rarely smooth and the potential for legal issues is high.
REITs offer stable cash flow through annual dividends and low-risk investments, with the potential for long-term capital appreciation. Although they might be viewed as slow-growing, they are safe and stable investments. There should be more effort made to make people more aware of REITs and legislation should be used to ease their operations.
REITs can be a major contributor to the economy. They can generate revenue through mortgages, construction, and taxes on dividends, as well as generating income for investors. They can be a source of funds for real estate acquisition and property development, especially in the housing sector, thus creating another path to solving Nigeria’s persistent housing crisis.