Real Estate Investment Trusts (REITs) are a great way to invest your funds in real estate without having to buy and take care of the properties yourself.
They allow you to diversify your investments and get passive income from the rent payments the trust collects.
In this article, we’ll discuss how REITs work, the types available in Nigeria, how to choose the right REIT portfolio, its pros and cons, and many more ways REITs can help you achieve your financial goals.
What Are Real Estate Investment Trusts (REITs)?
Real Estate Investment Trusts (REITs) allow groups of investors to invest their funds in real estate without having to buy and manage the properties themselves. REITs provide investors access to an asset class that has historically offered attractive returns and low volatility.
It allows investors to pool their capital and invest in various real estate-related projects, such as residential and commercial properties, mortgage loans, hotel operations, and more.
The main goal of REITs is to allow individual investors to invest in a diversified real estate portfolio without having to buy and manage the properties themselves. They are managed by a board of trustees and operate like mutual funds in that they control a portfolio of real estate assets that generate income.
How Do REITs Work in Nigeria?
REITs are typically structured as publicly traded companies, allowing them to be bought and sold on the stock market just like any other security. REITs provide numerous investors with capital gains from rental income generated by real estate assets like residential buildings, hotels, warehouses, office buildings, medical facilities, shopping malls, apartment complexes, resorts, self-storage facilities, etc.
Numerous REITs are openly traded on major stock exchanges, and investors can buy and sell them throughout the trading session like they would stocks. Here in Nigeria, they are traded on the Nigerian Stock Exchange (NSE), now the Nigerian Exchange Group, and regulated by the Securities and Exchange Commission (SEC).
REITs specialize in a specific real estate sector so that you can choose investments based on your interests and risk tolerance level.
Types of Nigerian REITs Available for Investment
Real estate investment trusts (REITs) in Nigeria are either structured as equity REITs, mortgage REITs, or hybrid REITs.
Equity REITs
This REIT is one of the most common and flexible ways to invest in Nigerian Real Estate Investment Trusts (REITs). Equity REITs focus on buying properties outright, while debt REITs invest in loans and mortgages that are backed by real estate. This gives investors a direct stake in the standard or commercial housing markets of Nigeria and the chance to get rental income from these same markets.
As an added bonus, investors in equity REITs get a larger share of the dividends than with other joint investments. This is because equity REITs have better tax advantages than traditional stocks, giving Nigerian investors a strong way to diversify their portfolios and take advantage of the opportunities in the country’s real estate market.
Mortgage REITs
Mortgage REITs, on the other hand, do not directly own or manage any real estate assets but instead focus on investing in mortgages and other debt instruments.
Mortgage REITs make money by giving short-term loans to people who are building or buying homes and then collecting the interest on these loans. They usually have concentrated investments that focus on one type of real estate asset, such as residential housing or commercial property.
As with all types of investment, it is important to understand the risks associated with investing in a mortgage REIT and the potential returns that can be expected.
Hybrid REITS
Investing in Nigerian real estate investment trusts (REITs) is made even more appealing with the availability of hybrid REITs. These particular kinds of REITs blend attributes from equity and mortgage REITs so that investors have options for portfolio diversification. Hybrid REITs offer a good balance between risk and return, which makes them attractive to many real estate investors.
Who Can Invest in REIT?
Investing in Real Estate Investment Trusts (REITs) can be a great way for investors to diversify their portfolios and gain exposure to the real estate market. But who is eligible to invest in REITs?
In Nigeria, REITs are open to all, from individuals and banks through to financial institutions, fund managers, and more. There are a lot of ways to invest in Nigerian REITs, but most have specific requirements that must be met before investors can get the most out of them.
To ensure eligibility for the best investment opportunities available with each individual REIT, it’s essential to fully understand the requirements associated with them prior to making any investments.
How to Choose the Right Nigerian REIT
When looking to add a Nigerian real estate investment trust (REIT) to your financial portfolio, there are crucial actors you must take into account.
Type of REIT
There are different types of REITs that specialize in various types of real estate, such as office buildings, residential complexes, retail stores, warehouses, and more. It is important to choose a REIT that is well suited to your investment goals and risk tolerance.
Financial Health of the REIT
It is important to research the financial performance and track record of any Nigerian REIT before making any investment.
Management Team
The quality of the management team is also a key factor when considering any Nigerian REIT. Research the experience and track record of the executives running the REIT before investing.
Dividend Yield
Many investors look for high dividend yields when selecting a REIT to invest in. However, it is advisable to research the dividend yield and terms of any Nigerian REIT you are considering before making your decision.
What Are the Pros and Cons of a Real Estate Investment Trust?
Investing in a real estate investment trust (REIT) has a number of benefits, such as liquidity, diversification, and large dividends that generate passive income. However, there are some drawbacks to consider, including taxes and fees and potential volatility due to fluctuations in the property market or interest rates.
Pros
Diversification
Investing in a Nigerian REIT allows investors to diversify their investment portfolio and capitalize on the potential returns offered by the country’s real estate market.
Low Cost of Entry
Equity REITs offer a low cost of entry, making them accessible to even small investors.
Liquidity
REITs appeal to investors because of their liquidity. The ability to buy and sell REITs on the stock market makes them a more liquid investment option than purchasing real estate outright.
Transparency
REITs are highly regulated and must provide regular financial reports, making them more transparent than other types of real estate investments.
Tax Advantages
Equity real estate investment trusts offer attractive tax advantages compared to traditional stock trading, since REIT dividends get taxed as ordinary income, resulting in a healthier dividend portion.
Cons
Risk of Default
Investing in mortgages or loans carries the risk of default, as borrowers may not be able to repay their debts and lenders may have difficulty recovering their investments.
Management Fees
REITs charge management fees, which can eat into returns, making it important to research the fees charged by any potential investments.
Liquidity Risk
Many Nigerian REITs are closed-ended funds, meaning investors may not be able to quickly liquidate their investments if needed. The liquidity of REITs is largely determined by investor demand, so it can be difficult to sell if there are no investors interested in buying the REIT.
Regulatory Risk
Nigerian REITs are subject to local regulations, which can change over time, making it important to stay up-to-date on any changes that may affect the performance of a REIT.
Tips for Managing Risk When Investing in a Nigerian REIT
When investing in a Nigerian Real Estate Investment Trust (REIT), it is important to understand the risks associated with such an investment and to put into place strategies to manage those risks. Here are some tips for managing risk when investing in a Nigerian REIT:
Research the Market
Thoroughly research the Nigerian real estate market and ensure you understand the risks associated with investing in a Nigerian REIT.
Diversify Your Portfolio
To minimize risk, it is important to diversify your portfolio by investing in multiple types of Nigerian REITs. By diversifying across multiple REITs, you can reduce the overall risk of your portfolio.
Monitor Your Investments
Pay close attention to how your REIT investments are doing and make changes to your portfolio as needed to get the best returns.
Top 3 REITs in Nigeria
UPDC Real Estate Investment Trust
Listed on January 1st, 2013 on Nigerian Exchange Limited (NGX). The UPDC REIT is a publicly traded fund that is regulated by the Securities and Exchange Commission (SEC) and has real estate holdings in bustling cities like Abuja and Lagos where it’s based. UPDC REIT has one of the largest Net Asset Value (NAV) in Nigeria, and its primary source of income is rental income from investment buildings.
The regular cash payment of this REITs dividends is intended to provide its unitholders with a reliable source of income, which is the REIT’s primary objective. This is accomplished through the distribution of 90% of the organization’s overall earnings.
The current share price of UPDC REIT, according to African Financials, is 3.00 NGN.
Union Homes REIT (UHREITs)
In 2008, Union Homes Savings & Loans Plc, a subsidiary of Union Bank of Nigeria Plc, set up this REIT with the goal of long-term capital growth from real estate investments. The trust invests in rental properties, mortgage-backed securities, and instruments related to the money market.
With a closed-end trust structure, unitholders can put their money into a portfolio that has been approved and is designed to bring in maximum gains and return.
The current share price of UHREITS, according to African Financials, is 36.60 NGN.
Skye Shelter Fund REITs
The Skye Shelter Fund REITs, which first began its operations in 2008, has been offering investors an untapped avenue to invest in residential and commercial real estate in Nigeria. It is one of the only three REITs currently available for investment, and it prides itself as the first REIT to be listed on the Nigerian Stock Exchange (NSE).
Skye Shelter has shown steady growth since its inception, as evidenced by its returns, which have consistently remained within a range that meets the Nigerian Money Market Rate. Skye Shelter also provides an extra incentive of protection for the funds invested; their investments carry a comforting assurance due to the platforms built to mitigate risk through diversification and aligned investment strategies.
For any potential investor who is thinking about putting money into Skye Shelter Fund REITs, the unbreakable benefits they offer in the form of higher returns and safety would be a sure way to get the most growth out of their money.
The current share price of SFS Real Estate Investment Trust, according to African Financials, is 77.00 NGN.
Setting Up A Licensed Real Estate Investment Trust in Nigeria
So what if you don’t want to invest in any REIT but want to set up your own?
The Nigerian government has implemented a law dictating the requirements and procedures for setting up a licensed real estate investment trust (REIT) in Nigeria. To set up a REIT, there are several steps that must be taken, as outlined below:
- Obtain a Certificate of Incorporation from Nigeria’s Corporate Affairs Commission (CAC).
- Obtain a license from the Security and Exchange Commission (SEC). The SEC requires all applicants of a registered fund manager to provide evidence of their qualifications and experience in managing securities. This must also include a detailed business plan highlighting the proposed management and structure of the REIT.
- Prepare an Information memorandum outlining the purpose, objectives and terms of reference of the proposed Fund Manager. This document is required by the SEC to ensure that potential investors understand all aspects of REIT investing.
- Notify SEC about your intention to set up a REIT by submitting an application with appropriate fees and other mandatory documents such as full audited financials for all related parties, an investment process description, company registration papers, etc.
- Appoint a qualified financial advisor who will be responsible for reporting on the performance and profitability of the fund manager’s investments over time to the SEC.
- Provide independent certification attestations on compliance with all legal requirements specified by the SEC, such as maintenance of investor demographic records, custody functions, transfer agent functions etc.
- Ensure compliance with applicable government regulations such as taxation rules.
- Establish a proper accounting system that meets international standards.
- Create policies for managing risks that will protect investors and protect the interests of fund managers.
- Design appropriate internal controls that ensure adherence to company policies.
- Get Insurance documentation from a recognized insurance company.
- Make initial capital contributions according to the proposed investment strategy.
- File all necessary forms with Nigerian Stock Exchange upon the successful launch of the REIT offer.
- Issue periodic reports regarding financial performance to investors.
FAQs on Leveraging Real Estate Investment Trusts (REITs) to Maximize Your Investment Returns In Nigeria
What Happens in a Real Estate Investment Trust?
A Real Estate Investment Trust (REIT) is a type of investment vehicle that allows investors to pool their money in order to purchase and manage income-producing commercial real estate properties.
What Are the Pros and Cons of a Real Estate Investment Trust?
Investing in a real estate investment trust (REIT) has a number of benefits, such as liquidity, diversification, and large, attractive dividends that generate passive income. However, there are some drawbacks to consider, including taxes and fees and potential volatility due to fluctuations in the property market or interest rates.
How to Invest in Real Estate Investment Trust in Nigeria?
On the Nigerian Stock Exchange (NGX), you can buy and sell REITs just like stocks through stockbrokers. Currently, only three of these trust estates have been recognized by the Nigerian Exchange Group – Union Homes, Skye Shelters, and UPDC, a subsidiary of UACN.
Are REITs a Good Investment?
Yes, Real Estate Investment Trusts (REITs) offer attractive dividend yields and tax advantages compared to other types of investments, and increased liquidity and long-term capital appreciation potential. However, it is important to understand the risks associated with investing in REITs before making any decisions.
How Does a REIT Make Money?
A real estate investment trust (REIT) makes money by buying, managing, and selling income-producing real estate properties. REITs generate income through rental fees paid by tenants and capital gains from the sale of properties. These profits are then distributed to investors in the form of dividends.
Final Thoughts
Nigerian investors can benefit from real estate’s potential returns by investing in REITs and diversifying their portfolios with a variety of options.
But it’s important to do your research: learn as much as you can about the different types of Nigerian REITs, look at each investment’s financial performance and track record, spread your investments across a number of REITs or funds, and stay current on market trends.
If you take this advice to heart, you’ll be well-positioned to make smart investments, and even though Nigeria experienced a difficult financial season in 2022, we anticipate 2023 will bring marked economic improvements – not only for REIT investors but all those involved in the real estate industry.
