AN EXPOSITION ON THE
CHALLENGES AND PROSPECTS OF REAL ESTATE INVESTMENT TRUSTS IN NIGERIA

Introduction

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[1]. 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.[2] 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.[3]

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[4] (ISA) along with the
subsidiary rules made pursuant thereto,[5] 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.[6]

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.[7]

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.[8]

For
both Equity and Mortgage REITs, not more than 10% of their total assets shall
be in liquid assets.[9]

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.[10] In Nigeria, the following
are some of the peculiar factors that impinge REITs performance:

Capitalization
(size)

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,[11] while in the United
States, the combined market capitalizations of REITs stands to the tune of US$898.41billion.[12] This hampers the ability
of REITs in Nigeria to respond adequately to economic upheavals.

Economic
factors

Up
until recently, Nigeria was enmeshed in economic recession which contracted the
economy by more than 1%.[13] 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.

Infrastructural
Challenges

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. [14]
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.

Tax
Benefits

Though
there is some sort of ambiguity on the tax regime for REITs in Nigeria,[15] 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.[16]

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.

Economic
Growth

Nigeria
presently has a housing deficit of 17 million.[17] 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.

Conclusion

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.[18]
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.[19] 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.[20]

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).