Real estate investment trusts struggle 15 years after taking off

In many advanced economies, real estate investment trusts, also known as REITs, offer investors the opportunity to put their money in real estate through mutual financing. However, since its official take off in Nigeria 15 years ago, REITs have not had exactly the same impact as in other countries. EDIDIONG IKPOTO looks at what REIT entails and why it failed in the Nigerian property market

For many centuries, investors could only put their money into real estate by rightfully buying pre-built homes or building one from scratch. For all intents and purposes, real estate was a capital-intensive business, and anyone without sufficient funds to invest in the acquisition of a property could not reap the dividends of the industry.

However, over the years many patterns have started to appear in the investment climate. Many of these models were primarily aimed at facilitating investments in real estate without necessarily injecting a huge amount of money with the aim of acquiring a property.

It was this experimental alternative to real estate investing that eventually gave rise to what became known as Real Estate Investment Trusts.

Historically, REITs began in the United States in the mid-twentieth century, shortly after World War II. The United States Congress officially created REITs in 1960 as an amendment to the extension of the excise tax on cigars. This provision, for the first time, allowed investors to buy shares in commercial real estate portfolios, which had previously only been available to high net worth individuals and through large financial intermediaries.

REITs, for the first time, brought the benefits of commercial real estate investing to ordinary people – benefits that could only be accessed through large financial intermediaries and high net worth individuals. The foundations of the modern REIT era followed with the Tax Reform Act of 1986, when REITs were given the ability to operate and manage real estate, rather than simply owning or financing it.

According to Investopedia, an online investment dictionary, a real estate investment trust is a corporation that owns, operates, or finances income-producing real estate.

REITs are modeled after mutual funds and the idea is to pool the capital of many investors. This allows individual investors to receive dividends on their real estate investments, without having to buy, manage or finance properties themselves.

Typically, properties in a REIT portfolio can include apartment complexes, data centers, healthcare facilities, hotels, infrastructure – in the form of fiber optic cables, cell towers and pipelines energy – office buildings, shopping centers, self-storage, woodlots and warehouses. .

Most REITs have a simple business model. The REIT rents space and collects rents from properties, then distributes that income as dividends to shareholders. Mortgage REITs do not own real estate, but rather finance real estate. These REITs earn interest income on their investments.

To qualify as a REIT, a company must comply with certain provisions of the Internal Revenue Code. These requirements mainly include the ownership of long-term income-generating real estate and the distribution of income to shareholders.

The Investment and Securities Act (ISA) 2007 and Securities and Exchange Commission Rules 2013 regulate REITs in Nigeria. Section 154 of the Act empowers the Securities and Nigerian Exchange Commission, SEC, to approve, register and regulate collective investment schemes in Nigeria, including those administered as a real estate investment trust.

According to the provision of Rule 509(1) of the SEC Rules, “A real estate investment trust may and must acquire and hold full legal title to property or elect to hold equitable and beneficial title to such property through a trust indenture or other structure as may be acceptable to the SEC.”

The SEC allows real estate investment trusts to hold or acquire assets through a declaration of trust in which the legal interests in the real estate belong to the seller and all beneficial interests are transferred to the real estate investment trust.

The first REIT in Nigeria (Skye Shelter Fund) was introduced in 2007, with a capitalization of around $6.5 million. It was officially listed on the Nigerian Stock Exchange (NSE) on February 28, 2008. The second REIT (Union Homes REIT) was introduced in 2008, with a market capitalization of approximately $40.8 million.

The fund is primarily involved in the acquisition of investment properties held for capital appreciation.

By net asset value, UPDC REIT is the largest in Nigeria and has a diversified portfolio of real estate assets in Lagos and Abuja.

However, the REIT, which first appeared in the Nigerian property ecosystem 15 years ago, has struggled to produce the scale of impact seen in other advanced economies.

In explaining the drawbacks of the initiative, experts cited structural inadequacies as the main reasons why REIT has not been able to move forward in Nigeria during its 15 years of experimentation.

One of the criticisms of REITs is that they don’t offer much in the way of capital appreciation. As part of their structure, they must return 90% of their income to investors. Therefore, only 10% of taxable income can be reinvested in the REIT to purchase new assets. Other disadvantages are that REIT dividends are taxed as regular income and some REITs have high management and transaction fees.

Another disadvantage commonly attributed to this form of investing is REIT fraud. The SEC advises investors to beware of anyone trying to sell REITs that are not registered with the SEC.

Real estate investment trust fraud is not uncommon. Companies, stockbrokers, financial advisers and fraudsters often manipulate individuals into investing in risky REITs with the promise of low risk and high returns.

It’s also a good idea to check the broker or investment adviser recommending the REIT. The SEC has a free search tool that allows anyone to find out if an investment professional is licensed and registered.

Speaking at a real estate symposium titled “Real Estate as a Tool for Economic Development” recently, Landmark Africa Managing Director Paul Onwuanibe said the REIT had no failed to make the desired impact on the Nigerian real estate ecosystem due to certain taxes. -related deficiencies.

He said: “The problem with REIT is that unless you provide the right tax incentive and make sure it’s easily accessible, it won’t work.”

Afriland Properties Managing Director Uzor Oshogwe said while the REIT had had significant successes in other parts of the world, Nigeria lacked the legal platform to manage some of the complexities there. found.

According to her, many of the finer details about REITs in Nigeria, especially the issue of double taxation, had yet to be ironed out. This, she said, had made most real estate professionals reluctant to sink their assets into the trust.

She said, “There are a lot of things we need to sort out. How are REITs faring in the economy? We all know we have three main REITs in the country – there’s Union Homes, there was UPDC who joined us in 2013 and this is 2022. You wonder why that hasn’t really off?

“When you think about it, what are the tax refunds you get? As it is, it’s double taxation because when they pay rent, you tax them. When you receive dividends, they tax you. That’s what it is, people coming together to do real estate. As an individual, I may not have the resources to build a hotel, but through Real Estate Investment Trust, I can actually buy stocks, stocks in real estate, if I buy stocks in UPDC REIT, I get dividends because I paid into that property pocket.

As an investment opportunity, the REIT has often been criticized for its lack of capital appreciation potential, and the Afriland boss also believes that placing his income-generating assets in a public pool could end up producing this undesirable result.

She added: “He says 90% of your income should be shared. I think there’s a rule that says you have to distribute that income. It’s complicated, and I think that’s the reason a lot of companies haven’t bought is that the properties you put in that pocket have to be active properties. These are properties that I make my income from and you want me to put them in a bucket and share them with a million other people? What are the incentives? I have not seen it. So I walked away. »

In a similar vein, the managing director of real estate research firm Estate Intel, Dolapo Omidire, said REITs, like other investment programs that rely on mutual funds, have always had suffered from structural problems.

Omidire said, “After the UPDC list, it’s not that there was any inactivity. People have tried REIT and failed. This means that there are a lot of things to sort out from a regulatory point of view. Similar to REIT, tokenization is a more technology-driven approach to trying to make real estate more accessible. People are grouped together to own part of the real estate.

“With unscrupulous individuals on the prowl, the boss of Estate Intel believes there is still a long way to go to dispel the doubts of potential investors who fear losing their hard-earned funds to charlatans and quacks. .”