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Pension fund: Why administrators avoid investment in real estate

Administrators of the fund raised from the contributory pension scheme (CPS) are deliberately avoiding investment in real estate, citing low returns on investment and illiquidity of real estate as an asset class.
The administrators, who also cite poor and unreliable real estate assets valuation, explain that an estimated 8 percent annual return on investment and about 5 percent annual rental yield, do not make real estate an attractive investment asset class, adding that the assets cannot be converted easily to cash when the need arises.

Longe Eguarekhide, managing director, AIICO Pension Managers Limited, who disclosed this at a lecture in Lagos, also revealed however that discussions were ongoing between pension fund administrators and primary mortgage operators on how contributors to the pension scheme could access part of their retirement savings for use as equity contribution for mortgage loans.

From 2004, when the contributory scheme came into being, contribution has been quite significant and has progressively grown from N5.4 trillion a couple of years ago to N7.5 trillion at the moment, coming from contributors who represent a little above 4 percent of the country’s 170 million population.
These contributors are predominantly employees of over 200,000 employers of labour in both the public and private sectors of the economy, while the amount so far contributed is managed by operators, including 21 pension fund administrators (PFAs), seven closed pension fund administrators (CPFAs), and four pension fund custodians (PFCs).

The fund is meant to be invested in high yield investment asset classes in various sectors of the economy, but the administrators insist that, “even though real estate is a secured and relatively high yield investment asset class requiring long term and low rate funds, pension funds cannot be invested directly in it for reasons stated above.”

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They also cite policy and regulatory framework among other challenges, explaining that housing policies in Nigeria have the characteristics of being inconsistent and poorly coordinated. “Lack of political commitment and differing approaches between sovereign and sub-national entities are also part of the policy challenges,” Eric Fajemisin, CEO, IBTC Pension Managers, said at a forum in Lagos.
He cited the National Housing Fund (NHF) managed by the Federal Mortgage Bank of Nigeria (FMBN), which had a total collection of well over N2 trillion, but was yet to fully realise its goal.
The Land Use Act of 1978, which rests the power to allocate and revoke land on the state governors, is one of the regulatory challenges, which, Fajemisin said, was slowing down process of obtaining titles to ownership of land and also making property registration not only costly, but also difficult.
Pension funds administrators, like other investors, see opportunities in the housing sector, which, apart from being supported by favourable demographics, also presents investment opportunity valued at N56 trillion by the FMBN.
The country’s over 170 million population with over 80 percent of this number living in unplanned settlements under poor living conditions; only 13 million housing stock with only 5 percent in the formal mortgage, make the housing sector an investment destination, but not for the pension administrators.
“Housing or real estate generally can play a special role in the economic dialogue in Nigeria as it can generate employment, increase productivity, raise standard of living and alleviate poverty”, Fajemisin admitted, adding that unlike UK, US, China, Korea and Singapore where home ownership levels are 78 percent, 72 percent, 54 percent, 52 percent, and 92 percent respectively, home ownership is only 10 percent level in Nigeria.

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