Nigeria’s Emerging REIT Market

Investment in real estate has been one of the oldest and most common forms of investment dating back to the beginning of human civilization, evolving into a more sophisticated market having its own real estate backed securities, which could be issued privately or on the domestic/international capital market. The desire to pool resources from multiple investors to acquire prime real estate, which would otherwise be out of the financial reach of any single investor, birthed the concept of Real Estate Investment Trust (REITs) schemes. While this has been in use in the United States as far back as the early 1960s, it was first pioneered in Nigeria by Skye Shelter Fund when it floated its 1st  Tranche of the N5 Billion Hybrid REIT in January 2008.

Real Estate is generally considered to be an indicator of the economic performance of any Nation. Over the last decade, especially following the end of global economic crisis and the failing equities market; the global real estate market experienced a boom having been perceived as a safe haven by investors. Consequently the once volatile global market saw countries like the United Kingdom, Australia, South Africa, USA, Singapore, Malaysia, Mexico and Hong Kong growing their real estate market into an enviable Global REIT market.

REITs are a form of collective investment scheme, which involves the pooling of capital by a group of investors and utilising same in the acquisition of a select portfolio of income generating real estate; mortgage loans; or a combination of both. The portfolio of underlying assets is placed under professional management to maximise returns to the investors; each holding an indivisible interest in the underlying assets of the REIT proportionate to its investment. These schemes which are constituted under a Trust Deed wholly acquire and hold title to investment grade, income producing real estate properties or related assets. A REIT may be classified according to the nature of its underlying assets. In this regard, REIT comes in two forms; Open-ended and Close-ended.

OPEN-ENDED REIT
1. Does not have a fixed investment size.

2. It is able to admit new investors at any time

3. The REIT is obliged to pay out any investor seeking to exit/liquidate its investment making the Net Asset Value of such fund very fluid and having a higher liquidity demand

CLOSE ENDED REIT

1. Fixed fund size and the number of investible units from inception which cannot be increased during the life of the Scheme
2. New investors cannot be admitted once the offer for subscription closes
3. Usually has its units listed on a stock ex-change or capital trade point and the investment can exit by an investor selling out the units held on the exchange without recourse to the REIT.

Since 2007, when the Securities and Exchange Commission (SEC) introduced the framework for the establishment of REITs, the Nigerian investing public has been given an opportunity to invest in a diversified portfolio of choice real estate assets. The market regulators SEC, the Nigerian Stock Exchange (NSE), the Federal Inland Revenue Service (FIRS) and the Federal Government of Nigeria (FGN) have also continued to seek new ways in creating an enabling environment for this asset class to thrive while bearing in mind its capacity to deliver stable long term value investment; meet Nigeria’s rising housing demand; attract foreign portfolio investment into the Nigerian Real Estate sector; support the drive for real estate infrastructure development & diversification from concentration of investments in traditional equities; and other fixed income instruments.

Read also: Investors advised to leverage REITs as alternative real estate financing

From inception to date, the market has witnessed the establishment of 5 REIT Schemes, 4 pure equity REIT schemes and 1 Hybrid scheme. It is notable that industry experts are getting a better grasp of this previously unpopular asset class, evidenced from the creativity and significant improvement in the structure of each subsequent REIT Scheme.

The HMK REIT is seen to have utilized very creative credit enhancement models such as a Bank Guarantee to hedge credit losses, over collaterization and the introduction of a market maker to stimulate liquidity for its units.

Whilst the Nigerian market may not be as developed as other frontier markets such as Mexico, India and Ireland (on account of its inherent challenges), this asset class has definitely come to stay and is expected that the wholesale reform of the Real Estate sector being undertaken by the FGN and its development partners will have a positive impact on this segment of the market.