REAL ESTATE INVESTMENT TRUSTS – THE FUTURE OF REAL ESTATE DEVELOPMENTS?
Throughout history, as man and society have evolved, socio-economic development has been intertwined with the ownership, control, and use of land. Today, land retains its relevance as a store of value and a mainstay of economies, a status which is underlined by its continued retention as a factor of production. In the last half-century, land, also known as real estate, has been increasingly crucial to the creation of rights, interests, liabilities, and income-generating opportunities. This relevance is largely underscored by the fact that the global financial crisis of 2008 largely resulted from a series of real estate-based transactions. Liquidity is the ease of buying or selling an asset. Real estate is an inherently illiquid asset as land, relative to other asset classes, often cannot be disposed of without a significant fluctuation in price or lapse of a significant amount of time. Globally, financial markets serve the primary purposes of providing liquidity by efficiently bridging the gulf between the demand and supply side for capital. Financial markets fulfil this objective by the provision of investment vehicles tailored to the needs and risk appetites of the investing public. The funding provided by retail and institutional investors are utilised by businesses to finance their operations and provide income in the form of returns distributed to their investors.
REAL ESTATE INVESTMENT TRUSTS- DEFINITION, REGULATORY FRAMEWORK AND ADVANTAGES
Financial markets play a key role in investment in the real estate sector by the creation of Real Estate Investment Trusts(“REITs”). A Real Estate Investment Trust is an investment vehicle which owns and manages capital-intensive income-generating real estate projects and infrastructure such as residential apartments, hotels et al. Typically, the portfolio of properties owned by REITs are divided into units which are listed on an exchange and made available to investors who acquire interests and earn dividends on the units held. Substantially modelled after mutual funds and equities, REITs convert real estate from an illiquid asset class to a liquid one and provide investors with the opportunity to invest in real property, diversify their holdings and earn returns on their investments. Prior to the emergence of REITs, investment in real estate was often structured in two ways:
- The purchase and subsequent sale of property; and
- The development of property for income generation in the form of rents paid by commercial or residential tenants.
The traditional investment models for this asset class were largely based on land’s illiquid nature. Considering the limited availability of commercially viable land, REITs play a crucial role in creating viable investment opportunities.
Under Nigerian securities law, real estate investment schemes can be structured as a unit trust (REITs) or as a company (Real Estate Investment Company (REICO)). This article will focus largely on investment schemes structured as REITs.
The legal framework for the regulation of REITs in Nigeria is principally comprised of the provisions of the Investment and Securities Act (ISA) (2007) and the Rules and Regulations of the Securities and Exchange Commission (2013). Section 193 of the ISA defines a REIT as “A body corporate incorporated for the sole purpose of acquiring intermediate or long-term interests in real estate or property development [and] may raise funds from the capital market through the issuance of securities.” The Rules and Regulations of the Securities and Exchange Commission define a real estate investment scheme as “a company, a trust or other such corporate structures that may be approved and regulated by the Commission, which is primarily engaged in, and invests in income-generating real estate assets or real estate-related assets”
Section 194 of the ISA states that a Real Estate Investment Trust may be registered by the Securities and Exchange Commission if it fulfils the following conditions:
- a body incorporated under the Companies and Allied Matters Act;
- has a capital and reserve as prescribed by the Commission from time to time;
- carries on business as a collective investment scheme solely in properties;
- complies with the requirement prescribed by the Commission through its Rules and Regulations made from time to time.
WHY CONSIDER REITs?
- Low Barrier of Entry: Using REITs, investments can be made in real estate without the investor outrightly purchasing a property in its entirety. This peculiar nature of REITs enables investors to easily buy an interest in property without making a substantial down payment. This feature opens up the real estate market to diverse groups of investors who are able to invest at amounts which tend to be significantly less than the purchase price of the property.
- Tradability: Like other securities, REITs are traded on exchanges, a feature which ensures the swift sale and purchase of interests in the underlying property. Tradability is a significant advantage over direct property ownership, since the sale of real estate assets outside the REIT structure is often difficult, expensive, and time-consuming.
- Professional Management: REITs are managed by highly skilled and experienced real estate professional managers. This means they are driven to get the best sustainable performance from property assets.
- Transparency: The regulatory framework of REITs includes extensive reporting and governance provisions which reduce the risk burden and makes the managers of REITs accountable to the regulators as well as the investors. These requirements ensure good governance, transparency and accountability. REITs provide investors with regular statutory reporting and are subject to strict oversight.
- Tax Exemptions: REITs earn income in a variety of ways- rental income, returns on investments in other REITs, capital gains et al. REITs and their investors are prominent beneficiaries of a number of tax waivers and exemptions. Section 23 of the Companies Income Tax Act (as amended by the Finance Act 2021) provides that the dividends distributed by a unit trust are exempted from Companies Income Tax.
- Regular Income: As a result of the legal structure and the need to qualify for the tax incentives in their favour, REITs have to distribute the bulk of their income. The Companies Income Tax Act (as amended) provides that for REITs to qualify for tax exemptions, at least 75% of the dividend and rental income must be distributed to the investors within 12 months of the income being earned. For investors, this means a stable income and return on their investments. This is very dissimilar to earnings on equity securities which are largely based on potential capital appreciation and the recommendations of management.
- Diversified Portfolio: Given the huge capital that is needed for direct real estate investment, most investors are unable to achieve an all-inclusive asset class portfolio which includes real estate. Institutional investors such as Pension Funds, Insurance companies and Custodians can also take good advantage of this diversification opportunity to reduce risk exposure and maximise gains.
- Public Infrastructure: REITs have often intersected with the interests of public and private sector and have in several instances been used to finance infrastructural development. In 2021, China floated twelve public REITs in order to raise the capital required for investments in infrastructure. 
COMPARATIVE ANALYSIS- REITS ACROSS JURISDICTIONS
The emergence of REITs can be traced to the 1960s in United States of America where the US Congress created legislative provisions which allowed investors purchase shares in commercial real estate portfolios- an investment option only previously available to high-net worth individuals and institutional investors. In the years which have trailed the emergence of REITs in the United States, REITs have evolved into a viable investment vehicle across jurisdictions. This development has been largely driven by widespread adoption of REITs and the creation of legislation and regulatory frameworks.
At the end of 2021, a total of 865 REITs were listed globally with a combined market capitalisation of approximately $2.5 trillion. Between 1990 and 2021, the adoption of REITs has skyrocketed with the number of listed REITs growing from 120 REITs in two countries (the United State and the Netherlands) to 865 REITs in more than forty countries and regions- an increase of 86.1%.
In the African sub-region, which is largely populated by developing countries, REITs are more a potential than established asset class with several countries failing to mirror the REITs adoption rates of other regions. South Africa has the most advanced and largest REITS market on the continent with at least 30 listed REITs and a market capitalisation of an estimated 17.7 Billion Dollars. Of the 24 emerging markets ranked in 2021, South Africa was ranked the largest emerging market. . Nigeria, Kenya, Ghana, Morocco, Tanzania and several other African countries have a limited number of REITS in spite of their enactment of laws which recognise and regulate REITs.
The Nigerian economy is largely regarded as one of the fastest-growing economies in Africa, with real estate contributing an estimated 6.5% to Nigeria’s annual GDP. The Nigerian REITs market commenced in 2007 with the issuance of guidelines for registration and operation of REITs by the Securities and Exchange Commission and the listing of the Skye Shelter Fund on the Nigerian Stock Exchange. The Skye Shelter Fund was listed with a capitalisation of Two Billion Naira. In 2008, Union Homes Hybrid REITs was listed with a capitalisation of Fifty Billion Naira. In 2013, the UPDC REIT was listed with a capitalisation of Thirty Billion Naira. Nigeria’s three REITs account for an estimated 0.4% of the market capitalisation of the Nigerian Exchange Limited and a fraction of the market capitalisation of the African REITs Market.
REITs are generally rated as a profitable asset class across jurisdictions. However, the global successes of REITs are yet to be replicated in the Nigerian market as investments in Nigeria’s real estate sector via REITs have largely defied the growth potential and early speculation which trailed the creation of the regulatory framework for REITs and the subsequent listing of REITs in Nigeria.
In the years which have followed the listing of the first REIT, the Nigerian economy has underperformed with multiple budget deficits and infrastructural gaps serving as lingering effects of the performance. Considering Nigeria’s economic challenges and the use cases of REITs for driving economic growth, capital required for the development of infrastructure can be raised from domestic and foreign investors and invested in much-needed infrastructure including highways, power generation facilities, seaports, and the non-exhaustive list of crucial infrastructure required across several sectors of the Nigerian economy.  However, REITs cannot be leveraged in this manner without significant improvements to the land registration regime.
In 2020, Nigeria was ranked 183rd out of 189 countries on the ease of registering property index of the World Bank. The difficulty in registering land hinders the transition of property from informal ownership to a form in which it can be acquired and utilised for investment purposes via REITs.
Despite the existence of REITs as an asset class in Nigeria as well as the creation of regulation which govern the operation of REITs and ensure transparency and investor protection, the high growth potential of the sector is far from being realised as investors in Nigeria’s REITs are stuck in an underperforming market with a substantial portion of potential assets yet to be registered.
Considering the under-performance of the Nigerian economy in recent years and the limited resources available to the public sector to make crucial investments in infrastructural development, REITs can serve as the means to the end that is raising the capital required to invest and close these gaps. However, the ability of Nigeria’s REITs to replicate the growth percentages and economic advantages the REITs investment vehicles has created in other jurisdiction is largely hinged on the enforcement of land registration reforms which need to happen sooner rather than later.
- Aloaye Daniel Igiekhumhe, Associate
This document is intended only as a general discussion on the subject of this article, do not regard it as legal advice. We would be delighted to provide additional details or advice about specific queries, if required. For further information, kindly send an email to: email@example.com
 What Is an Illiquid Asset? (thebalance.com)
 Section 154 of the Investments and Securities Act.
 Rule 508 of the Rules and Regulations of the Securities and Exchange Commission.
 Section 23(s) Companies Income Tax Act(as amended)
 REITs: Regulatory framework, robust returns set to prompt Indian REITs next growth phase – The Economic Times (indiatimes.com)
Photo by Timur Saglambilek: https://www.pexels.com/photo/white-concrete-building-under-sunny-blue-sky-87223/