REITs?
To understand real estate, first, you need to understand different ways investors can diversify their portfolios.
The reason is simple.
Years ago, investors like you could only purchase a property that tend to be capital-intensive.
Which requires a lot of formality and processes to get done.
With REITs, you can conveniently purchase real estate shares in the stock market, allowing investors to benefit from investment trusts.
Here’s the thing.
While Real Estate Investment Trusts are well established in countries like the US, they are gradually gaining traction in Nigeria.
In this article, let’s explore the concept of REITs.
Understanding Real Estate Investment Trusts(REITs)
According to Mondaq, 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.
It shows that REITs can be used as investment vehicles to pool funds from multiple investors to acquire, manage, and operate income-generating real estate properties.
These properties may include commercial buildings, shopping malls, hotels, residential complexes, and warehouses.
With this, investors in Real estate investment trusts earn returns through dividends, which are derived from rental income and capital appreciation of the properties held within the trust.
In this case, we can say reits function similarly to mutual funds.
For mutual funds, you can easily see investors buy shares and benefit from professional management.
Similarly, REITs provide the opportunity to invest in high-value real estate assets without the need to directly purchase or manage properties.
This makes Real estate investment trusts attractive to both institutional and retail investors.
Let’s take a look at the types of REITs in Nigeria
Types Real Estate Investment Trust Nigeria
REITs are regulated by the Securities, Exchange Commission and the Nigerian Stock Exchange.
However, there are three main types of REITs available to investors:
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Equity – These REITs own and manage income-generating properties. Investors earn dividends from rental income and potential property value appreciation.
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Mortgage – These REITs invest in mortgages and real estate loans rather than directly owning properties. They earn income through interest on mortgages.
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Hybrid – These combine elements of both equity and mortgage REITs, investing in both physical properties and real estate loans.
Problem of Real Estate investment trusts
While REITs offer benefits such as accessibility to small-scale investors, portfolio diversification, and liquidity, but several problems hinder their effectiveness and growth in Nigeria.
Inconsistent Returns
The performance of REITs in Nigeria varies significantly due to the diverse nature of their underlying assets.
Many Nigerian investors may not fully understand the distinctions between different types of REITs.
Some Real estate investment trusts focus on owning and managing rental properties.
While others primarily invest in mortgage-backed securities or provide financing for real estate development.
This distinction affects their risk and return profiles.
Economic factors such as fluctuating interest rates and inflation significantly impact REIT performance.
For instance, when interest rates rise, mortgage-based REITs often decline in value as new loans offer higher returns.
Conversely, rental-based REITs might benefit from increasing rents driven by inflation.
Moreover, sectoral investment choices play a crucial role.
REITs focusing on commercial real estate, hospitals, or industrial properties tend to offer more stable returns.
Whereas those investing in hospitality, retail, and entertainment properties face higher risks due to economic volatility and changing consumer behavior.
Liquidity Constraints and Market Maturity
One of the key advantages of REITs globally is liquidity.
Investors can buy and sell shares more easily than traditional real estate investments.
However, in Nigeria, REITs face liquidity constraints due to the relatively underdeveloped capital market.
The lack of a vibrant secondary market makes it difficult for investors to exit their positions promptly, leading to reduced investor confidence.
Furthermore, Real estate investment trusts in Nigeria often have fixed investment durations, usually spanning several years.
When these REITs mature, the need to sell off assets to distribute returns can put downward pressure on property values.
In cases where the real estate market is underperforming.
Real estate investment trusts may struggle to find buyers, leading to losses for investors.
High Management and Transaction Fees
Nigerian REITs often come with high management and administrative fees, reducing net returns for investors.
Like mutual funds, REITs charge various fees, including asset management, transaction, and performance-based fees.
However, the lack of transparency in some Nigerian REITs means investors may not always be fully aware of the total costs involved.
Additionally, complex compensation structures among REIT management teams sometimes lead to excessive fees being deducted from investors’ earnings.
This has discouraged many retail investors who may already be hesitant to invest in a relatively new and poorly understood financial instrument.
Limited Growth Potential
REITs in Nigeria face growth limitations due to structural constraints.
By regulation, REITs are required to distribute a significant portion of their income(usually around 90%) to investors as dividends.
This leaves them with minimal retained earnings to reinvest in acquiring new properties or expanding their portfolios.
Consequently, the growth of Nigerian REITs largely depends on external capital inflows.
Which can be inconsistent due to economic instability and foreign exchange challenges.
Additionally, weak property rights, bureaucratic delays in land acquisition, and inadequate infrastructure further slow down the expansion of REITs in Nigeria.
The regulatory environment, while improving, still presents challenges that hinder swift and efficient real estate development.
Taxation Issues
Tax policies in Nigeria also pose a challenge to REIT investors.
While REITs are structured as pass-through entities, meaning they do not pay corporate income tax, individual investors face high tax rates on their dividend income.
Unlike capital gains from stocks, which enjoy preferential tax treatment.
REIT dividends are often taxed at rates that can go as high as 30-37%, depending on the investor’s total income bracket.
This makes REITs less attractive compared to other investment vehicles such as equities or government bonds, which may offer more favorable tax treatment.
Additionally, frequent policy changes and uncertainties in Nigeria’s tax laws create further unpredictability for REIT investors.
Advantages of REITs in Nigeria?
1. Accessibility to Real Estate Market
REITs provide an avenue for individuals to invest in high-value properties without requiring large amounts of capital.
Instead of buying a building outright, investors can own fractional shares in a diversified portfolio of properties.
2. Liquidity and Flexibility
Unlike traditional real estate investments that require time to sell properties.
REITs offer liquidity as they are publicly traded on the NGX.
Investors can buy or sell shares easily, similar to stocks.
3. Diversification and Risk Management
REITs reduce investment risk by diversifying across multiple property types and locations.
This minimizes exposure to market volatility compared to investing in a single property.
4. Regular Income Stream
One of the most appealing aspects of Real estate investment trusts is their ability to generate consistent income.
According to the law, Nigerian REITs must distribute at least 90% of their earnings as dividends, providing investors with a steady cash flow.
5. Professional Management
Real estate investment trusts are managed by experienced real estate professionals who handle property acquisition, maintenance, and rental agreements, eliminating the stress of direct property management for investors.
Challenges to consider
There are also some challenges to consider.
These are:
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Market Volatility: Like stocks, REITs are subject to market fluctuations and economic conditions.
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Regulatory Risks: Changes in government policies or real estate regulations can impact REIT performance.
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Limited Awareness: Many Nigerian investors are still unfamiliar with REITs, leading to low trading volumes and reduced market efficiency.
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Inflation and Interest Rates: Economic factors such as inflation and rising interest rates can affect rental yields and borrowing costs for REITs.
How to Invest in REITs in Nigeria
First,
Understand Your Investment Goals
Before investing, ask yourself.
Are you looking for passive income, long-term capital appreciation, or portfolio diversification?
Research Available REITs
Currently, Nigeria has a few publicly listed REITs, such as:
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UPDC – Focuses on commercial and residential properties.
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Skye Shelter Fund – Specializes in residential and commercial real estate.
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Union Homes – Invests in diverse property portfolios.
To get things right, you’ll need to study their past performance, asset portfolio, dividend yield, and management team before making a decision.
Open a Stock Brokerage Account
Since REITs are traded on the NGX, you’ll need a brokerage account with a licensed stockbroker.
The good thing is that they are many brokerages you can get started with.
All you need to do is to research different brokers to find one that offers competitive fees and user-friendly platforms.
Buy REIT Shares
Once your brokerage account is set up, you can purchase REIT shares through the Nigerian Stock Exchange.
In this case, you can start with a small investment and gradually increase your holdings over time.
Monitor and Reinvest
Track your investment regularly by reviewing market trends, financial reports, and dividend payments.
Just consider reinvesting dividends to compound your returns over the long term.
Future Outlook of REITs in Nigeria
The Nigerian real estate market has significant growth potential, driven by infrastructure development, and a growing middle class.
However, for Real estate investment trusts to thrive, regulatory frameworks must be strengthened, and investor awareness must improve.
As we know.
The Central Bank of Nigeria(CBN) and the Securities and Exchange Commission are working to create more favorable investment conditions, including incentives for REIT investors.
If these reforms succeed, Real estate investment trusts could become a mainstream investment vehicle in Nigeria, providing more opportunities for wealth creation.