Real Estate Investment Trusts in Nigeria
Real Estate is a diverse sector with several ways of investing. While most real estate investors focus on acquiring physical properties, there are a select few who choose an alternative that gives the investor to invest in a property without directly buying it. This is done through Real Estate Investment Trusts (REITs).
In this post we will look at some of the advantages and disadvantages of investing in a REIT.
What are Real Estate Investment Trusts (REITs)?
Real Estate Investment Trusts are corporations (trusts) that operate by pooling the capital of numerous investors, in order to buy and manage either properties that produce income or mortgage loans.
Investors in REITs are able to enjoy the capital appreciation and rental incomes earned on the real estate assets owned by the fund. Investors receive dividends from the profits of the fund. Additionally they are able to sell their shares for a premium when its value rises in the market.
Accordingly, REIT holders have the benefits of being able to hold real estate assets, without having to commit the typically large amounts of money required for investing directly in real estate. This also offers the luxury of not having to directly manage a property or a mortgage.
When you invest in physical real estate you are primarily looking to make money in one of two ways: either for the rental income that it brings or alternatively to buy, hold and sell a property for a profit i.e. flip it.
Real Estate Investment Trusts in Nigeria
In Nigeria REITs are traded on the Nigerian Stock Exchange (NSE). Similar to stocks and shares, REITs can be purchased and sold through licensed stockbrokers. Union Homes, Skye Shelter Fund and UPDC Real Estate Investment Trust are the main REITs in operation in Nigeria.
The REITs market in Africa is worth around $29 billion with operations in 4 countries: Ghana, Kenya, Nigeria and South Africa.
REITs in Nigeria, having been introduced into the market over 12 years ago, are among the oldest on the African continent. Despite this, they have yet to fully gain traction in the country. A report, by EY, puts the global market capitalization of REITs at $1.7 trillion.
Nigeria’s share of the global market is very small, with only three REITs listed on the NSE, falling short of South Africa’s over 30 on the JSE. The total market cap of the listed Nigerian REITs is valued at around 50 billion Naira and thus only accounts for approximately 0.4% of the NSE.
Some of the challenges faced by the REIT sector are lack of knowledge of the industry and restrictive legislation from things such as the Land Use Act 1978.
REITs or real estate: things to consider before you invest in either
Purchasing actual real estate requires significant amounts of capital. Investors need both upfront and ongoing capital.
- Upfront capital includes things like a deposit, legal fees, registry fees and valuation fees
- Ongoing capital includes a stable source of income (if taking out a mortgage), property taxes and maintenance fees
Should you wish to invest in multiple physical real estate assets the costs can quickly add up.
REITs require far less of an initial commitment. One can purchase these shares and test the waters, while still having room to put more money in. Due to stockbroker fees it can be unprofitable to invest small amounts in a REIT. Thus you do have to put in a fair amount to see a decent return on investment.
With physical properties you can potentially get financing to purchase real estate. You can get a private mortgage or you may have access to the National Housing Fund (NHF).
These loans can be leveraged to make more money than you can with REITs. With REITs you generally don’t have access to finance and when you do the amounts you can get are minimal.
For example, you put down 10 million Naira (20%) to buy a house worth 50 million. If the house rises in value by 5% to 52.5 million, you have gained 2.5 million Naira.
The same 5% capital gain you would have gotten had you invested the 10 million in a REIT would result in a profit of only 500,000 Naira.
In this case investing in a physical property has allowed you to see a return 5 times than that earned from a REIT.
Due to the initial high capital requirements needed, when directly owning real estate, you are likely not to going to be buying multiple properties at a time. As such, a significant portion of your assets may be tied up into one or two properties.
Investing in a REIT however, allows you to indirectly invest in a range of properties across a variety of different classes: both commercial and residential. Certain property types, such as malls and hotels, that may have been unavailable to single investors due to capital constraints, can be accessed more readily through a REIT.
Investing in REITs is relatively straightforward; you simply look at the publicly available data and decide on what to invest in (or hire an investment advisor to do the work for you). You can then proceed to purchase REITs through a brokerage company.
Buying and holding physical properties is a far more involved process: finding an estate agent, viewing properties, price negotiations, arranging financing and the like.
When the time comes to sell your investment property, finding a willing buyer to buy at the price you want, can take time: especially in a bad market.
With REITs the prices you buy and sell your shares at, are purely determined by the market (which can be a good or bad thing). Once your stocks are sold you receive the equivalent money fairly quickly.
Managing the property
Unless you hire a property manager, owning physical real estate means you will have to manage it yourself. This can be quite tedious work dealing with any tenants and maintaining the property.
Investing in a REIT means these aspects of property ownership are handled by a third party professional management team.
In the case of REITs, although you are leaving the management of your assets to professionals, this is in exchange for control. Here the property managers/controlling shareholders take all the decisions on your behalf. Decisions such are when to sell, rent out or improve a property are out of your control.
Owning property directly gives you the freedom to make your own choices as and when you need to.
The Nigerian REIT market
The REIT market in Nigeria, although growing, still remains largely undeveloped. As a result, the returns you may expect in more mature markets like the United States or United Kingdom may not materialize in Nigeria.
However, with directly owning real estate, it’s the opposite. Returns in Nigeria can often be much higher than that which you would get from more western countries.
Which is better?
Direct investment in property and investing in REITs both come with their pros and cons. Investors need to weigh up their options and determine what is more suitable for them. A mix of both REITs and directly owned real estate may be a good compromise.
In terms of actual wealth creation, Investing in physical properties may be superior. In terms of capital preservation and a more stress-free way of generating income, REITs may be better for you.
The most important thing, before you invest any money, is to make sure you are informed and understand the risks.