Before reading this article, you might have asked yourself, are there REITs in Nigeria? Yes, there are, they exist and are functional. REITs in Nigeria are among the oldest on the African continent, having been introduced to the market over 12 years ago.
While the majority of real estate investors in Nigeria focus on purchasing physical properties and investment options ranging from land-flipping to property development to co-investing, 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).
Although many Nigerians are not familiar with Real Estate Investment Trusts (REITs), there are three major Real Estate Investment Trusts in Nigeria, UPDC Real Estate Investment Trust, Sky Shelter Fund, and Union Homes Real Estate Investment Trust. Sky among
What do REITs stand for?
Real Estate Investment Trusts, or REITs, are collective investment schemes that pool investment capital from investors to acquire income-producing real estate or mortgage loans, or a combination of both.
In a REIT, a single investor can own one or several units of self-contained living space, and the investment group manages all of the units on the investor’s behalf, such as maintaining them, advertising vacancies, and interviewing potential tenants. tenants. In exchange for conducting these management tasks, the company takes a percentage of the monthly rent.
How do REITs work in Nigeria?
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. They are regulated by the Securities and Exchange Commission (SEC)
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, but in REITs, it’s the opposite.
Types of REITs
This type of REIT allows an investor to purchase, hold and manage commercial and rental properties.
In a mortgage REIT, an investor is not allowed to purchase, own or manage properties.
This combines the investment strategies of equity REITs and mortgage REITs by investing in both properties and mortgages.
The Pros and Cons of Investing in REITs
The real estate market in Nigeria is capital intensive, largely illiquid, and requires a high degree of expertise to purchase, and more importantly, manage developments, as well as earn high rental income.
Accordingly, REITs have been created to address the challenges real estate investors face with traditional real estate investing.
Key advantages of investing in REITs include access to finance for investment in real estate, professional management of real estate assets or projects, and an opportunity for investors to participate in real estate financing without getting involved in the day-to-day management of real estate processes.
Other advantages are tax advantages for companies that own and manage REIT properties, it’s an easy way of investing in real estate, and it offers the offering investors opens up a path to participating in the ownership of the real estate, without the hassle of managing properties.
One key disadvantage of REITs is the absence of immediate payment of profits by reason of the distribution rules and requirements for publicly traded REITs, which makes it difficult to sustain growth in the scheme.
Also, REITs do not allow investors who own stock directly the opportunity to monitor or manage the performance of the REIT, and to cut their losses, if need be, since an investor can only sell their shares when they are unsatisfied with the performance of the REIT.
7 Things to Consider Before Investing in REITs
While buying physical properties requires a substantial investment in both initial and ongoing capital to cover costs such as deposit, legal fees, registry fees, and valuation fees and among others, REITs require a far less initial investment because shares can be purchased to test the waters while still having room to invest more money.
Before you Invest in REITs here are 7 Things to Consider
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.
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.
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 on the other hand involves processes like finding an estate agent, viewing properties, negotiating prices, arranging to finance, and so on.
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. When you sell your stocks, you will receive the equivalent amount of money fairly quickly.
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.
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.
When it comes to investing in real estate in Nigeria, the best decisions are the ones that serve you, the investor. Consider your time, capital, and whether you want to be the one to deal with household issues when they arise.
Our team of real estate investment advisors can help you make the right decision. Let’s help you start on the right track, reach out to us here to get started.