AN EXPOSITION ON THE CHALLENGES AND PROSPECTS OF REAL ESTATE INVESTMENT TRUSTS IN NIGERIA
Globally, there has been a surge in property investments in the past few decades. As of the early 2000s, property investment accounted for the second largest investment sector in the US, next only to fixed-income securities, but larger than shares and the money market. This surge could be explained by the unique benefits offered to property investors such as income stability, capital growth, tax reduction and hedge against inflation which most other traditional investment options such as shares, and bond do not provide.
A REIT is a form of a property/asset backed collective investment scheme which itself constitutes a part of the larger concept of securitization. Essentially, a REIT is a company that owns, and operates income producing real estate asset or properties such as office buildings, residential buildings, shopping malls, tourism related facilities, healthcare facilities, industrial facilities, infrastructures, and warehouses, whose shares are publicly traded in a way similar to any other stock. Simply put, a REIT is a company or a trust that pools fund from individual investors, acquires and operates income generating real estate, and distributes the income derived from their owned properties as dividend.
The origins of REITs is traceable to the United States of America where the US congress in the 1960’s created the legal framework for REITs with a view to providing affordable access to investment in commercial property to all investors. Over the years, many countries around the world have come to adopt the REITs structure as a component of their securities market. As at 2011, there were 22 countries and territories around the world that have established REIT regimes.
In Nigeria, the enactment of the Investment and Securities Act, in the year 2007 paved the way for the introduction of REITs. That same year, the first ever REITs in Nigeria – the N2bn (US$10m) Skye Shelter Fund, was launched following the issuance of guidelines for registration and requirement for operation by the Securities and Exchange Commission (SEC). There are presently three registered REITs in Nigeria namely: Skye Shelter fund, Union Homes, and UACN Property Development Corporation (UPDC).
Within the African REIT context, Nigeria’s REIT market since 2007 rank amongst the oldest. This has however not translated into growth and acceptability of REITs in the country. In fact, other African countries that subsequently introduced REITs have record more successes than Nigeria in terms of acceptability and capitalization of REITs. It is against this backdrop that this article intends to examine and provide insights on the performance of Nigerian REITs, as well as provide recommendations on how to further improve REITs performance in the country
Legal Regime for the Registration of REITs in Nigeria
The Investment and Securities Act 2007 (ISA) along with the subsidiary rules made pursuant thereto, constitutes the statutory framework for the registration and regulation of REITs in Nigeria. Accordingly, Section 193 of the ISA defines REIT as:
A body corporate incorporated for the sole purpose of acquiring intermediate or long term interests in real estate or property development [and] may raise funds from the capital market through the issuance of securities.
Similarly, Section 194 of the Investment and Securities Act 2007 states that:
A real estate investment company or trust may be registered by the commission if it:
(a) is a body incorporated under the Companies and Allied Matters Act.
(b) has a capital and reserve as prescribed by the commission from time to time.
(c) carries on business as a collective investment scheme solely in properties.
(d) complies with the requirement prescribed by the Commission through its rules and regulations made from time to time.
However, for a REIT to be registered by Securities and Exchange Commission (SEC), at least 50% of its total shares subscription must have been subscribed.
In the same vein, Rules 511-542 of the consolidated SEC Rules 2013 make elaborate and specific provisions on the registration of REITs by the Securities and Exchange Commission.
Under the present legal regime, the following are the major categories of REITs:
Publicly Traded REITs/ Private REITs
Public REITs are REITs that are fully registered and regulated by the Security and Exchange Commission. They are typically listed on the Nigerian Stock Exchange and their securities/units of investments are publicly traded.
On the other-hand, Private REITs are privately owned REITs that are not listed nor traded on the Nigerian Stock Exchange. They are also not permitted to offer their securities to the public and only rely on private placement directed at high net-worth individuals in raising funds.
Equity REITs/Mortgage REITs
Equity REITs invest primarily in the acquisition and ownership of real estate such as residential apartments, malls/retail outlets, hotels, office/industrial complex, and rely on income generated from the collection of rent, and sales of these properties. Under the consolidated rules made pursuant to the ISA, 75% of the funds held by an equity REIT shall be in real estate, while the remaining 25% may be in real estate related asset.
Mortgage REITs advance loans to mortgage institutions and even individuals for the financing of mortgages. Sometimes, they purchase existing mortgages and mortgage backed securities. At least 75% of the funds held by a Mortgage REIT must be in mortgage assets, while the remaining 25% may be in real estate related assets.
For both Equity and Mortgage REITs, not more than 10% of their total assets shall be in liquid assets.
Parties to a REIT
The following are the primary parties to a REIT transaction:
Issuer/Promoter: This could either be an individual(s) or a company who envisions and registers the REIT. With them lie the powers to appoint trustees for the REIT. The promoter may become an investor by investing his land or asset into the REIT.
Unitholder/Investor: These are private individuals or members of the public who hold equitable interests in a REIT. They are entitled to receive periodic distribution of income and participate in any capital appreciation of the properties that make up the REIT.
Trustee: The trustee is responsible under the Trust Deed for the safe custody of the Assets of the REIT and holds the assets in the name of the REIT. Furthermore, the trustee oversees the activities of the manager and ensures the manager undertakes reporting and disclosures as per the trust deed and relevant regulations.
Manager: The fund manager is appointed to manage and administer the REIT in accordance with the objectives of the REIT as stated in the trust deed. The manager also identifies and recommends investment opportunities to other stakeholders.
Custodian: They are entrusted with the Title documents of the properties that form a REIT for safe keeping.
Property Manager: The property manager is appointed by the REIT manager and is in charge of the daily management of the properties that constitute the REIT and ensuring the properties are in good repairs.
Factors that Adversely Impact REITs Performance in Nigeria
There are broadly two classifications of factors that adversely impact on the performance of REITs, these are: formal factors which are the economic and market factors; and informal factors which encompass socio-political and operating environment. In Nigeria, the following are some of the peculiar factors that impinge REITs performance:
There is a direct correlation between the size in terms of capitalization of a REIT and its viability/potentials for increased revenue. This is hinged on the principle of economies of scale that may favor large REITs in terms of low operational costs and sufficient funding. More so, large REITs are better able to absorb economic shocks and manage economic downturns due to the availability of sufficient capital at their disposal which they can deploy as a buffer. Unfortunately, all of the registered REITs in Nigeria are medium scale REITs in terms of their capitalization. For example the combined market capitalization of the three REITs in Nigeria is US$131 Million, while in the United States, the combined market capitalizations of REITs stands to the tune of US$898.41billion. This hampers the ability of REITs in Nigeria to respond adequately to economic upheavals.
Up until recently, Nigeria was enmeshed in economic recession which contracted the economy by more than 1%. This fact is compounded with the high inflation and interest rates effective in the country. The resultant effect of this economic state of affairs is that there is low liquidity in the country for investments in REITs by potential investors. This may explain the reason why the Haldane McCall REIT was unable to be listed after failing to reach the minimum 50% subscription from the initial public offer. Top Services Limited has also proposed a N20 billion REIT but same is yet to be fully launched. Furthermore, not a few of the properties under REITs are fully occupied. This is because of the decreased earnings of the average Nigerian who many a times find those properties unaffordable.
There is no gainsaying that the value of a property is enhanced by the availability of the necessary infrastructural amenities such as good roads, electricity supply, water supply, amongst others. In Nigeria, where such amenities are neither readily available nor accessible, the value of most properties are diminished and this impacts on income derivable either as rent or gains from those properties that constitutes a REIT.
Property Transactions Costs
The cost of perfecting interests/Title in real estate is very expensive in Nigeria. Similarly, the process involved in seeking and obtaining Governor’s consent on transactions bordering on the transfer of legal interests in real estate as provided under the Land Use Act is rigorous and frustrating. Inevitably, these factors impact adversely on REITs performance, since the primary object of REITs centers on real estate transactions including sale and purchase of real estate assets.
Low Investor Awareness
Many individual investors are oblivious of REITs as an investment option with many associated benefits. Even the few institutional investors who are knowledgeable about REITs still have a poor perception about it and are generally disinclined to invest fully in the scheme. It would have been more desirable if these institutional investors were a little more receptive of REIT investments, as their investment decisions may not only help instill confidence and give credibility to REITs, but also spur other individual investors to follow suit.
Prospects of REITs in Nigeria
Notwithstanding the above highlighted challenges, investment in REITs portends a lot of benefits not just to the investor alone, but to the larger society. Some of these benefits include:
High and Reliable Returns
Returns is essentially the profit derived from an investment and is of three types: income; capital appreciation; and value gain. It has been proven through numerous studies that returns from REITs investment most times combine the three types of returns.  For example, an investment in income generating property such as a residential apartment let out to tenants, incorporates the three types of measurable returns. Furthermore, the average global dividend yield for REITs was about 4.3% in September 2012 far above some other traditional investment options.
Though there is some sort of ambiguity on the tax regime for REITs in Nigeria, it is generally agreed that the tax treatment for REITs is very advantageous compared to that of other investment options. Income distributed as dividends are exempt from companies income tax, while a withholding tax of 5% is applicable to dividends received by investors. However, undistributed income will be taxed at the corporate tax rate.
Liquidity and Diversification of Investment Portfolio
Real Estate is classified as an illiquid asset. However, investments in REITs have made it possible to hold liquid interests in real estate which can be transacted on the stock exchange rather than buying properties directly. Furthermore, REITs afford investors the opportunity to invest their funds in different property types across various geographical spread thereby reducing risks and volatility of investment.
Nigeria presently has a housing deficit of 17 million. Investments in REITs can help reduce this deficit by providing affordable housing to the teeming populace. More so, the real estate industry is intricately connected with other pivotal sectors of the economy such as the construction, service, and consumer industries. Accordingly, a viable and robust real estate investment industry will create jobs and distribute wealth across the country.
Hedge against Inflation
REITs provide an effective and formidable hedge for investments against inflation. This is because real estate income tends to increase in proportion to a corresponding increase in inflationary rates.
A dispassionate assessment of REITs in Nigeria reveals under-performance. This is evident in the number of registered REITs listed on the Nigeria Stock Exchange. Since 2007, when the first REIT was registered, Nigeria presently can only boast of 3 registered REITs. This can be compared with a country like South Africa, where despite the fact that the REIT legislation was passed as recent as 2013, currently boasts of 31 REITs with a combined value of over $31.42 billion. This leaves much to be desired. Similarly, almost all of the 3 registered REITs in Nigeria have been struggling with decreased revenue, and decline in profits distributed as dividends to investors. This has also contributed to the palpable apathy by investors in investing in REITs securities. In the light of the foregoing, the following recommendations are apt:
Adoption of Favourable Economic Policies by Government
The government should endeavor to implement policies that will occasion economic growth. This may include reducing the monetary rates and the cash reserve ratio of banks so as to consequently reduce interest rates and make more money available in circulation. The government should also adopt measures to reduce inflation.
Reduction of Property Transaction Costs
Property transaction costs such as consent fee, registration fee, and capital gains tax should be reduced so as not to erode the income of REITs. Also a special REIT registry may be created and dedicated to handling all REIT related property transactions.
Improved Awareness on REITs
There should be concerted efforts by existing and Prospective REITs on sensitizing investors and the public at large on the immense benefits of investing in REITs securities. This will help stimulate interests in REITs and ultimately improve the capitalization of the REIT market.
Article by Olayinka Alao LLM (Lagos), BL (Abuja), LLB (Lagos).
, DM, Miller, NG, Clayton, J & Eichholtz, P 2001, Commercial real estate analysis and investments, Second Edn, Cengage Learning, Mason, OH, USA.
 See Farooq Oreagba’s Position Paper on the Implementation of REITs in Nigeria (N-Reit) available at www.proshareng.com
 Wong, A. (2004). REIT Return and Property Types. (Masters Thesis), National Center University.
 Act No. 29
 section 313 of the ISA
 Rule 538 of SEC Consolidated Rules
 See Rule 539(1a) of the SEC Consolidated Rules
 Rule 539(1b)
 Rule 539(1c)
 See Baum & Murray’s 2010 paper titled “Understanding the Barriers to Real Estate Development”
 See Dolapo Omidire’s “Here are the Challenges facing Nigerian REITs and the actions Regulators will take” available at www.ateintel.com
 See O. Olanrele’s thesis paper titled “Analysis of the Performance and Acceptance of Real Estate Investment Trusts (Reits) in Nigeria” available at www.studentsrepo.um.edu.my
 See article titled “UPDATE 3-Nigeria’s economy shrinks in 2016 for first time in 25 years” available at www.reuters.com
 See O. Olanrele Supra
 See Dolapo’s Omidire’s “Here are the Challenges facing Nigerian REITs and the actions Regulators will take” available at www.estateintel.com
 See Oreagba, Supra
 See Anietie Akpan’s “Nigeria’s Housing Deficit Hits 17 Million” available at www.guardian.ng
 See Aninie Kilian’s “South African REITs make their mark among South Africa’s top listed companies” available at m.engineeringnews.co.za
 For example see the financial statements of the Union homes REITs for the year 2016, available at www.nse.com.ng
 See comments of Mr. Abimbola Ogunbanjo in Vanguard Newspaper’s report titled “Restrictive Legislation Undermines REITs Operation” published on 28th May, 2018 and available at www.vanguardngr.com