The Managing Director of the Federal Mortgage Bank of Nigeria (FMBN), Mr. Gimba Ya’u Kumo has been quoted severally to have put the cost of bridging the country’s housing deficit at an estimated N56 trillion based on a conservative cost of construction at N3.5million per unit, a figure that is not far from the World Bank’s estimated N59.5 trillion.
The figures no doubt underscore the vast and untapped investment potential of the country’s real estate sector with a 17 million housing deficit as at 2013.
Given the huge capital that is required for direct real estate investment, most investors are unable to achieve a real estate portfolio that is diversified across real estate types, such as commercial real estate, residential real estate among others and it has also become overwhelming for the National Housing Fund (NHF) with such colossal amount.
Experts in recent time have unanimously stressed that it has become very pertinent to explore offshore funding possibilities to boost financing for mass housing which the nation urgently needs.
This reflection came under serious consideration at the recently concluded Real Estate Unite 2015, an annual flagship summit where global real estate leaders discuss pertinent opportunities and issues in Africa’s real estate market.
Speaking on capital and demography, Nnema Byrd, CFA, a Principal, West Africa Specialist at STANLIB, in structuring investments in real estate property, conducting due diligence and capital raising emphasized that in spite of the shocks that the Nigerian market is facing, long term trend remains strong, Africa collective GDP is supposed to continue growing.
She said available figures show that population growth by the end of the century will witness growth especially between 18 to 64 years of age, an important group that drives employment and productivity.
The Nigerian population is expected to grow at compound annual rate of 2.4 percent per year which compares to the annual growth rate of the world at about 0.9 percent. Nigerian prime age population is expected to exceed the total depended population through the end of the century.
“We anticipate by 2050, Nigeria will have a total population of 413 million people. The working age demographic is supposed to be the fastest in the world at 3 percent through 2050,” she said.
Nnema said, “These people will need a place to live, shop, work and be entertained, are we prepared for that?” she asked rhetorically.
The expert advocated the need to take a critical look at Real Estate Investment Trusts (REIT) as viable and dependable source of unlocking finance to the housing sector if we must close the gap that is expected to quadruple with the projected population figures.
The need to give all investors in Nigeria the opportunity to invest in large-scale, diversified portfolios of income-producing real estate in the same way they typically invest in other asset classes – through the purchase and sale of liquid securities gave birth to REIT in Nigeria with Skye Bank Plc pioneering this move with its Skye Shelter Hybrid REIT in July 2007. This was followed by the Union homes REIT – making up the two known REIT’s in the country.
An analysis by proshare indicated that the two listed REITs have a total net asset value of $2.36bn, which is far below South Africa’s 43 REITs valued at $24bn – an indication of poor investors’ orientation/awareness in the sector despite the huge potential in the real estate sector.
Mrs. Olumayowa Ogunwemimo, Managing Director, FSDH Asset Management Limited, the fund manager of UAC Property Development Company (UPDC) REIT said, “REITs provide investors with opportunity to invest in a diversified real estate portfolio, ensure that its investments are not concentrated in one part of Nigeria.”
She explained that REIT poolS funds together from many investors in order to purchase real estate assets and/or real estate related instruments, which have the ability to generate income.
REITs allow investors to be beneficial owners of real estate assets, without having to make huge capital investments, as is typical of direct investment in real estate.
The Securities and Exchange Commission (SEC) of Nigeria released the first set of guidelines for REITs in Nigeria (N-REITs) per the Investment and Securities Act (ISA) 2007. REITs in Nigeria can be either closed-end or open-end. They must have at least 100 unit holders.
The Central Bank of Nigeria (CBN) and the Debt Management Office (DMO) declared Asset Backed Securities (ABS) as exempt from taxes for 10 years. N-REITs are Asset Backed Securities.
At least 75 percent of a closed-end REIT assets must be in real estate. At least 70 percent of an open-end REIT assets must be in real estate or real estate-related. None of their assets may be outside Nigeria.
At least 75 percent of their income must come from rents, mortgages or sale of property. At least 90 percent of net income must be distributed to unit holders. REITs in Nigeria are regulated by the SEC and the Federal Inland Revenue Service (FIRS).
The first established REIT was SkyeShelter Fund, but it lacked tax exemption. REITs in Nigeria are structured to have a fund manager, a property manager and trustees.
Hakeem Ogunniran, UPDC noted that the first problem is that Nigeria still does not have a proper legislation on REIT. He said, “There is no law on REIT, what we do is to apply the law on collective investments on REIT and that is not best practice.
“These are the reasons we still have the hues around taxation and capital gains. It is because we have not created the right frame work for REIT, people are asking why we have not seen many more REITs. That is because the regulatory frame work is still very challenging.”
He pointed out that because South Africa has created a unified system which brings REIT in line with international best practice, in terms of capital gain stand on the structure of the company, they now have 27 listed entities.
Funke Okubadejo, a Director at Actis in her presentation noted that REIT is at its infancy stage and that accounts for why since 2013 when the UPDC REIT was listed, the country has not really seen any other REIT successfully take off.
She said, “Investors come in and they are not really clear on what the tax regimes would be since there are really no laws as it were, that make it clear how a REIT is.”
Today, REITs are highly successful and beneficial in about 20 countries world over, in respect of providing less risky investment options in real estate to both small and big investors, regular and dependable income to the unit holders and attraction of massive Foreign Direct Investment (FDI) in the real estate sector of these countries.
Stakeholders therefore concluded that with appropriate enlightenment on the pockets of tax exemption available for the REITs in Nigeria and the right legislation, REIT could provide the required boost to this sector.
By Sunday Michael Ogwu