Exploring REITs in the Nigerian Market: Opportunities and Risks
Real Estate Investment Trusts (REITs) in Nigeria offer a unique and convenient way for investors to generate real income from real estate without direct property ownership. This comprehensive guide explores the concept of REITs, their key features, different types, presence in Nigeria, pros and cons, and factors to consider before investing. Whether you’re a seasoned investor or a newcomer to the world of real estate, this guide will provide valuable insights to help you make informed decisions.
What are REITs?
REITs are corporations that own and operate income generating real estate such as residential and commercial properties. Including office buildings, apartments, warehouses, hotels etc. They pool capital from multiple investors to acquire and manage properties or mortgage loans, allowing individuals to earn dividends from real estate investments without the complexities of direct ownership. In simple terms, REITs provide investors with the benefits of holding real estate assets without committing large amounts of money required for direct property investments.
Types of REITs
Equity REITs: these type of REITs purchase, hold, and manage commercial and rental properties. Their main focus is on profits through property acquisition and management. They generate revenue primarily through rents and not reselling properties.
Mortgage REITs: while equity REITs purchase , mortgage REITs do not purchase, own, or manage properties. Their primary focus is investing in mortgages on real estate properties, using them as collateral for their loans. They have no ownership position in the properties themselves.
Hybrid REITs: they combine the investment strategies of equity REITs and mortgage REITs. They invest in both properties and mortgages, offering a diverse portfolio.
REITs in Nigeria
In Nigeria, REITs are traded on the Nigerian Exchange group (formally called Nigerian stock exchange), allowing investors to buy and sell REITs like stocks. The REIT market in Nigeria is still growing and evolving, with only three REITs listed on the exchange group, representing a small share of the market capitalization. Although Nigerian REITs are among the oldest on the African continent, having been introduced into the market about 15 years ago, they are yet to fully gain traction in the country compared to more mature markets like South Africa, which has over 30 REITs listed on the Johannesburg Stock Exchange (JSE).
Pros and cons of Investing in REITs in Nigeria
Liquidity: REITs provide a liquid investment avenue compared to direct property ownership.
Diversification: Investing in REITs allows individuals to indirectly purchase a variety of real estate, including both residential and commercial properties.
Convenience: Investing in REITs is more convenient as investors can buy shares through a brokerage firm without the complexities of physical property ownership.
Tax Benefits: REITs offer tax benefits for businesses that own and operate REIT properties, making them tax-efficient investment options.
Opportunity for Real Estate Ownership: REITs offer investors the opportunity to share in real estate ownership without the headache of property management.
Low Growth Potential: REITs may offer lower growth potential compared to direct real estate investments in certain cases.
Liquidity risk: Although REITs are traded on stock exchanges, they may not always be easy to sell. If there are no buyers for your shares, you may have to sell at a loss.
Market Risk: REITs are subject to market risk, and their value may fluctuate depending on market conditions.
Interest rate risk: If interest rates rise, the cost of borrowing for REITs can increase, leading to lower profits.
Operational risk:REITs can face operational risks such as mismanagement or poor investment decisions, which can lead to lower returns for investors
Things to Consider Before Investing in REITs in Nigeria
Leverage: Evaluate the potential for finance options, such as private mortgages or the National Housing Fund (NHF), for direct real estate investments.
Diversification: Consider the diverse real estate assets available through REITs, including non-residential properties like hotels and malls.
Data: Assess the ease of investing in REITs through publicly available data or by engaging an investment advisor.
Liquidity: Understand the liquidity of REIT shares, allowing investors to convert their investments into cash more easily.
Property Administration: Compare the time and effort required for self-management of physical real estate versus entrusting property administration to a REIT.
Control: Determine the level of control and decision-making that investors give up when investing in REITs compared to direct property ownership.
Top REITs in Nigeria
Skye Shelter Fund REITs
Skye Shelter Fund popularly called SFSreits is focused on development and/or acquisition of high quality stock of properties in select locations across Nigeria. The company invests 75% directly in real estate (residential and commercial properties ) and 25% in real estate related investments which includes: mortgages, real estate backed securities and real estate related equities.
One of the largest Nigerian investment trusts based on its net asset value. UDPC was established in 2013 and operates as a close-ended real estate investment trust. It engages in the investment and ownership of diversified portfolio of income-generate real estate properties.The company mainly invests in residential and commercial real estate properties in Abuja, Lagos and other big cities across the country.
UH Real Estate Investment Trust, formerly known as Union Homes Real Estate Investment Trust (UHOMREIT), is a managed closed unit trust scheme aimed at achieving long-term capital appreciation through real estate investments. The Trust Deed allocates up to 90% of the funds to real estate and related investments, ensuring a focus on real estate assets. Additionally, up to 10% of the total assets, is invested in high-quality money market instruments to maintain liquidity.
Established in 2008, UH Real Estate Investment Trust is under the management of Union Homes Savings & Loans Plc, a subsidiary of Union Bank of Nigeria Plc.
How to invest in a REIT in Nigeria
Investing in a Real Estate Investment Trust (REIT) in Nigeria is simple and easy. Just follow these steps
- Decide on your investment amount: Before investing, think about how much money you want to put into the REIT. Consider your financial goals and how much risk you are comfortable taking.
- Choose the right REIT: Research the three main REITs available in Nigeria carefully. Look at their past performance, dividend history, financial reports, and the properties they own. You might need to reach out to someone in the company for more information.
- Open a brokerage account: To invest in a REIT, you need to open a brokerage account with a stockbroker registered with the Nigeria exchange group (formerly Nigerian Stock Exchange).
- Buy REIT shares: Once your brokerage account is set up, you can purchase the REIT shares. You can do this online or by visiting your broker’s office.
- Monitor your investment: Keep an eye on how your investment is doing. REITs usually provide quarterly or annual financial reports to investors, which can help you track your investment’s performance.
Choosing Between Direct Real Estate Investment and REITs
When choosing between direct real estate investment and REITs, carefully weigh the pros and cons of both. Direct real estate investment may offer superior wealth creation potential, while REITs provide capital preservation and an easier approach to generating income.
A balanced approach of combining both REITs and direct real estate investments may suit some investors’ preferences and risk tolerance.
Generally, investing in REITs in Nigeria presents an alternative opportunity in the real estate market without the complexities of direct property ownership. As with any investment opportunity, thorough research and expert advice are essential to mitigate risks and maximize returns. Whether you choose to invest in REITs or opt for direct real estate investment, remember that staying informed and aware of the market conditions is vital for successful investing in Nigerian real estate.