All You Need to Know About Real Estate Investment Trusts in Nigeria

Real estate is a diverse industry with numerous investment options. While the majority of real estate investors focus on purchasing physical properties, a select few choose an alternative that allows the investor to invest in a property without directly purchasing it.

This is accomplished through the use of Real Estate Investment Trusts (REITs).

This article discusses some of the benefits and drawbacks of investing in a REIT.

What do real estate investment trusts stand for?

Real Estate Investment Trusts (REITs) are corporations (trusts) that pool the capital of many investors to buy and manage either income-producing properties or mortgage loans.

REIT investors can benefit from capital appreciation and rental income generated by the fund's real estate assets. Dividends are paid to investors from the fund's profits. Furthermore, they can sell their shares at a profit if the market value rises.

As a result, REIT holders benefit from the ability to hold real estate assets without committing the typically large sums of money required for investing directly in real estate. This also provides the benefit of not having to manage a property or a mortgage directly.

When you invest in physical real estate, you are primarily looking to make money in one of two ways: either through rental income or by buying, holding, and selling a property for a profit, i.e. flipping it.

Nigerian real estate investment trusts

REITs like other stocks are traded on the Nigerian Stock Exchange (NSE). REITs, like stocks and shares, can be bought and sold through licensed stockbrokers. The main REITs in Nigeria are Union Homes, Skye Shelter Fund, and UPDC Real Estate Investment Trust.

The African REITs market is worth approximately $29 billion, with operations in four countries: Ghana, Kenya, Nigeria, and South Africa.

REITs in Nigeria are among the oldest on the African continent, having been introduced to the market over 12 years ago. Despite this, they have yet to fully establish themselves in the country. According to an EY report, the global market capitalization of REITs is $1.7 trillion.

Nigeria's global market share is very small, with only three REITs listed on the NSE, compared to South Africa's over 30 on the JSE. The total market capitalization of listed Nigerian REITs is around 50 billion Naira, accounting for approximately 0.4 percent of the NSE.

The REIT sector faces many challenges, including a lack of industry knowledge and restrictive legislation such as the Land Use Act of 1978.

Things to think about before investing in REITs or real estate Capital required

Buying actual real estate necessitates a substantial investment. Investors require both initial and ongoing capital.

A deposit, legal fees, registry fees, and valuation fees are all examples of upfront capital.

Ongoing capital consists of a consistent source of income (if you take out a mortgage), property taxes, and maintenance fees. The costs of investing in multiple physical real estate assets can quickly add up.

REITs require a far less initial investment. These shares can be purchased to test the waters while still having room to invest more money. Small investments in REITs can be unprofitable due to stockbroker fees. As a result, you must invest a significant amount to see a reasonable return on investment.

Leverage

With physical properties, you may be able to obtain financing to purchase real estate. You can obtain a private mortgage or apply to the National Housing Fund (NHF).

These loans can be leveraged to earn more money than REITs. REITs generally do not have access to finance, and when they do, the amounts available are small.

For example, suppose you put down 10 million Naira (20% of the purchase price) on a house worth 50 million. If the house's value rises by 5% to 52.5 million Naira, you will have gained 2.5 million Naira. The same 5% capital gain you would have received if you had invested the $10 million in a REIT would have resulted in a profit of only 500,000 Naira. In this case, investing in a physical property allowed you to earn five times the return of a REIT.

Diversification

Because of the initial high capital requirements, you are unlikely to buy multiple properties at once when directly owning real estate. As a result, a sizable portion of your assets may be invested in one or two properties.

Investing in a REIT, on the other hand, allows you to indirectly invest in a wide range of properties in both commercial and residential classes. Certain property types, such as malls and hotels, that may have been inaccessible to individual investors due to capital constraints, can now be more easily accessed through a REIT.

Convenience

Investing in REITs is simple; simply look at publicly available data and decide where to put your money (or hire an investment advisor to do the work for you). You can then proceed to buy REITs through a brokerage firm.

Buying and holding physical properties is a much more involved process that includes things like finding an estate agent, viewing properties, negotiating prices, arranging to finance, and so on.

Liquidity

Finding a willing buyer to buy at the price you want to sell your investment property can take time, especially in a bad market.

The prices at which you buy and sell your REIT shares are solely determined by the market (which can be a good or bad thing). When you sell your stocks, you will receive the equivalent amount of money fairly quickly.

Property administration

Owning physical real estate requires you to manage it yourself unless you hire a property manager. Dealing with tenants and maintaining the property can be time-consuming.

When you invest in a REIT, you are entrusting these aspects of property ownership to a third-party professional management team.

Control

In the case of REITs, you are giving up control in exchange for leaving asset management to professionals. All decisions are made on your behalf by the property managers/controlling shareholders. You have no control over decisions like when to sell, rent out, or improve a property. Direct ownership of property allows you to make your own decisions as and when you need to.

Nigeria's REIT market

Although growing, Nigeria's REIT market is still largely undeveloped. As a result, returns in more mature markets such as the United States or the United Kingdom may not be realized in Nigeria. The opposite is true when it comes to directly own real estate. Returns in Nigeria are frequently much higher than those in more western countries.

Which is preferable?

Direct property investment and REIT investment both have advantages and disadvantages. Investors must weigh their options and decide which is best for them. A mix of REITs and directly owned real estate may be an acceptable compromise.

Investing in physical properties may be superior in terms of actual wealth creation. REITs may be a better option for you in terms of capital preservation and a less stressful way of generating income. The most important thing to do before investing any money is to ensure that you are well-informed and understand the risks.

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