Before the development of Real Estate Investment Trusts (REITS), stakeholders could only invest in real estate by purchasing properties. This proved to be capital intensive and also required a lot of processes. However, with the advent of REITs, investing in real estate has been made easy. One can easily purchase real estate shares in the stock market and enjoy the benefits associated with investment trusts.
REITs serve as a platform for investors to engage in the real estate market without having to purchase and manage properties themselves. They are Collective Investment/fund management schemes engaged mainly in investing in income-generating real estate assets or real estate-related assets.
This Article discusses REITS in Nigeria, the regulatory requirements and some attendant challenges.
WHAT ARE REITS
Real Estate Investment Trusts (REITs) are corporations (trusts) that own, and in most cases operate, income-producing real estate. REITs own many types of commercial real estate, including office and apartment buildings, warehouses, hospitals, shopping centers, hotels and commercial forests. REITs are entities that operate by pooling the capital of numerous investors, in order to buy and manage either properties that produce income or mortgage loans.
REITs pool the capital of numerous investors. This makes it possible for individual investors to earn dividends from real estate investments—without having to buy, manage, or finance any properties themselves.
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
TYPES OF REITS
There are mainly three types of REITS, namely:
1. Equity REITs: They purchase, hold, and manage commercial and rental properties. Their primary focus is on profits through acquisition and management. Equity REITs generate revenues mainly through rents not by reselling properties.
2. Mortgage REITs: Mortgage REITs do not purchase, own or manage properties. They invest through mortgages on real estate properties. Though these properties serve as collateral for the loans the mortgage REIT invests in, the REIT has no ownership position in the property itself.
3. Hybrid REITs: This type combines the investment strategies of equity REITs and mortgage REITs by investing in both properties and mortgages.
MERITS AND DEMERITS OF REITS
REITs can play an important role in an investment portfolio because they can offer a strong, stable annual dividend and the potential for long-term capital appreciation. REITs offer attractive risk-adjusted returns and stable cash flow. The drawback is that REIT dividends are taxed as regular income, and some REITs have high management and transaction fees. Below are some of the pros and cons of REITS.
4. Stable cash flow through dividends
5. Attractive risk-adjusted returns
1. Low growth
2. Dividends are taxed as regular income
3. Subject to market risk
4. Potential for high management and transaction fee
REITS IN NIGERIA
In Nigeria, REITs are traded on the Nigerian Stock Exchange (NSE). Just like stocks and shares, REITs can be purchased and sold through licensed stockbrokers. The REITs market in Africa is worth about $29 billion and operates in Countries like Ghana, Kenya, Nigeria, and South Africa.
REITs in Nigeria, having been introduced into the market about 15 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 Ernst & Young (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 Johannesburg Stock Exchange (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 major REITs in Nigeria include UACN Property Development Corporation (UPDC) REITs, Skye Shelter Fund REITs, and Union Homes REITs.
Under Nigeria law REITs must pay out 90% or more of their taxable profits (to shareholders in the form of dividends. As a result, REIT companies are often exempt from most corporate income tax. Shareholders of REITs who receive dividends are taxed as if they are ordinary dividends.
Legal title to properties in the REIT scheme resides with the fund manager while the investors hold an equitable title and beneficial interest through the Trust. The Section 509 (1) SEC Rules provides that:
“a Real Estate Investment Trust can and shall wholly acquire and hold legal title to property or choose to hold equitable and beneficial title to such property vide a Trust Deed or such other structure as may be acceptable to SEC”.
Section 509 (2) of the Rules provides that:
“Where a real estate investment scheme property is held vide a deed of trust or such other structure acceptable to the Commission the following safeguards shall be maintained:
- Register a caution indicating the interest of the scheme in the relevant land registry that the property is located;
- Affix plaques and other notices on the relevant property indicating the interest of the scheme;
- Deposit the original title documents and other relevant pre-signed documents with the scheme’s custodian.
- Provide such indemnity to the scheme as may be necessary in the circumstance.”
The above provision of Section 509 (2) is aimed at protecting the interest of the REITS.
REITS are mainly regulated by the Corporate Affairs Commission, and the Security and Exchange Commission.
Regulations applicable to REITs are the Investment and Securities Act (ISA) 2007, Securities and Exchange Commission Consolidated Rules and Regulations (2013), Companies and Allied Matters Act 2020, The Finance Act 2021, and the Nigeria Land Use Act 1978.
REQUIREMENTS FOR REGISTRATION OF REITS
The Investments and Securities Act empowers the Securities and Nigerian Exchange Commission (SEC) to approve, register, and regulate collective investment schemes in Nigeria, including those that are administered as a real estate investment trust.
The Securities and Exchange Commission (SEC) Checklist for The Registration of Real Estate Investment Trust Scheme (REITS) outlines the requirements for registration with the Commission:
1. Requirements for Registration of Real Estate Investment Trust
- Application Form SEC 6A
- Two copies of Draft Prospectus
- Two copies of Trust Deeds
- Letter of consent from the prospective parties to the trust
- Two copies each of Certificate of Incorporation and Memorandum/ Articles of Association of Managers duly certified by the Corporate Affairs Commission
- Two copies each of Certificate of Incorporation and Memorandum/ Articles of Association of Trustee to the trust duly certified by the Corporate Affairs Commission
- Two copies each of the particulars of the directors of the manager and trustees of the trust certified by Corporate Affairs Commission
- Sworn Undertaking to file evidence of the maintenance of separate Trust Accounts in a reputable bank
- Evidence that the minimum paid up capital of the Manager and Trustee complied with the requirements of the Commission as stipulated in these Rules and Regulations.
Requirements for the Registration of Units of Real Estate Investment Trust
1. The name under which the issuer is doing business and the address of its principal office
2. The name of the proposed scheme
3. Date of commencement
4. Investment objective of the scheme
5. Investment outlets
6. Number of units proposed for issue.
7. Nominal value per unit
8. The names and address of the Directors or persons performing similar functions, the Chief Executive Officer and the Chief Accountant
9. The name(s) and address(es) of brokers to the scheme
10. The names and addresses of all persons owning 5% and above of any class of shares of the issuer both on record and beneficially as at the date of filing the application for registration of the trust scheme
11. The amount of the proposed units of the issue to which any person specified in paragraphs (viii), (ix) and (x) have indicated intention to buy or subscribe.
12. The general nature of the business actually transacted or to be transacted by the manager
13. Sworn undertaking to file quarterly reports with the Commission
14. Any other information required by the Commission from time to time.
CHALLENGES OF REITS IN NIGERIA
1. Lack of Public Awareness:
Despite the fact Nigeria was the first African country to have a REIT which was floated by Skye Shelter Fund in 2008, studies shows that REIT is still at infancy in Nigeria; A survey conducted shows that only 58% of persons that participated in the survey are aware of REIT as a concept and its operation. Mrs. Bola Adigun, a Director at PricewaterhouseCoopers (PwC), is of the opinion that lack of investor’s familiarity with REITs and real estate as an asset class has limited the growth of the sector, and 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.
It is therefore pertinent that more should be done by stakeholders, the media and government to create more awareness about REITS to members of the public and potential investors.
2. Difficulties in processing and procuring land title:
This is another major challenge facing the sector in Nigeria. The processing of land title documents usually faces a lot of bureaucracy and can take up to six months or more to perfect. The process is usually cumbersome and affects the smooth acquisition of properties. Regulatory Agencies like the Abuja Geographical Information System (AGIS), Land Registries and other regulatory bodies have to be more responsive. It is also advisable that an Agency or Department be created to expedite the process of processing and procuring land title documents. An example of such an Agency is the One-Stop Investment Centre (OSIC), which is under the Nigerian Investment Promotion Commission (NIPC).
3. Lack of tailor suited regulatory framework:
Currently, the main regulations applicable to REITs are the Investment and Securities Act (ISA) 2007, Securities and Exchange Commission Consolidated Rules and Regulations (2013), Companies and Allied Matters Act 2020, and the Nigeria Land Use Act 1978. It is suggested that legislation that will be exclusive to the real estate sector and REITS should be put in place to robustly regulate the sector.
With the ever-growing need for affordable housing across the country, the real estate sector continues to grow and contribute immensely to Nigeria’s GDP. A recent report by the National Bureau of Statistics (NBS) showed that the construction and real estate sectors contributed N20 Trillion to the GDP in the first three quarters of 2022. While construction services earned N12.9tn real estate contributed N7tn to the GDP. Real Estate Investment Trusts remains a viable and lucrative means through which investors can invest in the real estate sector and get profit without directly involving themselves in its management.
In developed countries, REITS are quite popular and vastly contribute to the economy. A report by EY states that in 2021, REITs contributed 3.2 million jobs and $229.0 billion to the US economy. However, in Nigeria, not many people know about REITs and how it operates, there are also other challenges facing the sector already discussed in this paper. A conscious effort to create more awareness about REITs should be made by the government and stakeholders, laws should be passed that will enhance the smooth and effective operations of REITS.
In a nutshell, if given the necessary interest, legal framework and support by the government and stakeholders, REITS in Nigeria can become a cash cow and boost the country’s economy.
- The Investment and Securities Act (ISA) 2007
- Securities and Exchange Commission: New Rules and Amendments to the Rules and Regulations of the Commission (2017).
- The Securities and Exchange Commission Consolidated Rules and Regulations (2013)
- The Companies and Allied Matters Act 2020
- The Nigeria Land Use Act 1978
- Journal of Nigerian Institute of Estate Surveyor and Valuers: An Examination of Stakeholders Views.
- The Guardian: Why real estate investment trust penetration remains low in Nigeria (March 9, 2020)
Robinson Robert Nweye is a Senior Associate at Marcus-Okoko & Co, and he specializes in Corporate Advisory, Real Estate & Property Law, and Regulatory Compliance.