Why real estate investment trust penetration remains low in Nigeria
As the Nigeria’s housing shortfall rumbles on, the impact of Real Estate Investment Trusts as alternative home finance naturally designed to reduce the 17million-housing deficit in the country have left much to be desired overtime, with little or no significant impact.
By law real estate investment trusts are companies that invest in capital intensive real estate projects or mortgage on behalf of their shareholders for the purpose of generating constant streams of income either through rentals, sales or mortgage of properties and pay back dividends on investment to these shareholders.
In 2007, the Securities and Exchange Commission issued the first set of guidelines for the registration and issuance of requirements for operation of REITs in Nigeria as detailed in the investment and securities act.
Investigation shows that as at 2018, Returns on Investment (ROI), in Nigerian REITs was below what comes back to investors in this instrument in other economies. Despite its large-size market, return on investment in REITs in Nigeria is 7 percent as against 15 per cent in South Africa and 9 per cent in Kenya.
Despite the potential benefits to investors, the growth of real estate investment trusts in Nigeria, has been so dismal. As of 2016, the four major players in that real estate subsector listed on the Nigerian Stock Exchange have a combined market capitalisation of over ₦45 billion. These include Skye Shelter Fund PLC, Union Homes Real Estate Investment Trust, UPDC and UACN Property Development Company. While there have been little or no further improvement from 2019 to date
A source told The Guardian that the listed sector in Nigeria has remained fairly illiquid over the years adding that demand is there from pension funds and other institutional investors, but the regulation is very much tax inefficient which has reduced their attractiveness.
Expounding on the issue, a director at the multinational professional services network of firms, PricewaterhouseCoopers, PwC, Mrs. Bola Adigun, explained that lack of investor’s familiarity with REITs and real estate as an asset class has limited the growth of the sector. The director disclosed that investor’s sentiments on Nigerian REITs are currently negative mainly due to the general poor performance of the market.
Adigun said most individual investors are also unaware of REITs as an investment choice due to poor public enlightenment by authorities and non-visibility in terms of publication of financials of REITs companies.
She stated that prior to the finance bill passed in 2020, there was a lack of assurance on ambiguous tax pass through laws, which did not provide comfort to investors. The proposed changes in the finance bill she said however, seek to align the tax treatments with global best practice, which involves treating REIT as tax neutral vehicles.
According to her, there exists a gap in the determination of returns from individual assets held by REITs. This she revealed means that investors are not able to tell the exact yields of underlying assets owned by a REIT and this is mainly caused by lack of a clear framework on determination of returns as well as valuation standards.
She said, “The media should help to popularise REITs in Nigeria. There is general lack of clarity on tax structure and REIT needs market transparency.”
The Chairman, Faculty of Real Estate Consulting of the Nigerian Institution of Estate Surveyors and Valuers, (NIESV), Mr. Niyi Fadoju explained that existing knowledge gap on how REIT works has limited effective penetration and the reality that many Nigerians want quick returns on investments and so look at short term investment areas whereas, real estate is something that isn’t short term.
“Real estate investment trust is basically having units rather somebody building a whole house or an entire estate. A person can just invest in a part of an estate. The Nigerian economy itself is not encouraging. Some people have tried it in the past but there wasn’t support from government coupled with the knowledge gap, they couldn’t move to the next level. The real estate industry is a sub-set of the Nigerian economy and when the economy itself is limping, then you don’t expect the sector to be sprinting.”
He said the Central Bank of Nigeria (CBN) policy is discouraging high interest rate for Treasury Bill but a lot of people that have money in treasury bill doing nothing, are now thinking of alternative investments and how to make the money to really work and create employment in the economy. This he stated was a good move on the part of the CBN.
Fadoju said, “The issue is that there should also be trust so that when people invest in RELTS, they don’t lose their investments. Though investment is a risk but it shouldn’t be that people don’t lose so much. The more stable the economy is, the better people are able to forecast and the better foreign and local investors would want to commit their money to the economy.”