Deficit in A-grade real estate, economy fingered for REIT underperfomance
Deficit in A-grade real estate compared to similar urbanising environments, coupled with a volatile and on-diversified economy that relies much on crude oil have been fingered for the low investment in Real Estate Investment Trusts (REITs) in Nigeria.
An additional factor responsible for this low investment in REITs is lack of assurance on ambiguous ‘tax pass through’ laws that have not provided comfort to institutional investors, both local and foreign, resulting in a REITs market that has failed to develop to its potential.
Though new reforms hope to address these factors, they have created cycles of boom and bust, which have negatively impacted the real estate sector and investor confidence
A report by Northcourt Real Estate obtained at the weekend notes that despite its existence for more than 10 years, the Nigerian REITs market is underdeveloped with only three established ones, which have a combined market capitalisation of $151 million, or 0.36 percent of the local stock market.
But analysts have predicted a bullish future for the market. At the real estate-focused West African Property Investment (WAPI) Summit, which took place in Nigeria recently, participants were provided with insights into a real estate sector that is set to rebound strongly in 2018.
Foremost real estate analysts, Adeniyi Adeleye, head of real estate finance for West Africa at Stanbic IBTC Capital, and Thomas Mundy, advisory head for Sub-Saharan Africa at Jones Lang LaSale (JLL), raised optimism in REITs in their collaborative white paper on the most underinvested and marginalised markets of the Nigerian stock market.
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Adeleye and Mundy provided an analysis of underlying structural weaknesses that have contributed to the historical negative performance of REITs in Nigeria, but hoped that an evolving and reformed REITs market will strengthen and deepen capital markets.
“It will also assist in providing greater transparency and data to a traditionally opaque market, which has resulted in mispricing and undermining confidence in real estate assets”, they assured.
Additional benefits that will follow a reformed REITs market is a greater diversification of portfolios to help break concentration risk and result in increased exposure for Nigeria’s pension funds to the property market. Currently, the pension fund exposure is 0.36 percent compared to South Africa’s pension fund exposure to REITs, which stands at 2.6 percent.
Adeleye and Mundy are optimistic that these changes would lead to a vibrant REITs market that will transform the real estate sector and the larger economy, provided that regulatory improvements take place coupled with the sustainable creation of assets to reduce the supply gap in Nigeria.