Before the onset of industrial revolution, wealth and power was measured primarily in terms of the amount of land owned by an individual or family.
Although the twentieth century has seen the rise of securitisation and the resulting increase in stock and bond ownership, but real estate investment can still prove a profitable option for those who are actively engaged in an asset allocation programme or just looking to diversify their current portfolio.
In Nigeria’s capital market today, there are evidences of growing interest in Real Estate Investment Trusts (REITs) which may not be unconnected to the underlying benefits associated with REITs particularly in relation to taxes. Simply put, REITs allow investors to acquire real estate in a tax efficient manner.
With the recent entrant of UPDC REIT, there are already two REITs under the supervision of Securities and Exchange Commission (SEC) –namely the Skye Shelter Fund being managed by Skye Financial Services; and Union Homes REITS being managed by Union Homes Saving & Loans plc.
Amid this growing investment vehicle, many experts are beginning to reveal the factors that should either drive further participation by existing investors or even lure potential investors to participate.
For instance, Sesan Adetiloye, head, structured finance, BGL plc recently pointed out that REITs are generally exempt from taxation at the trust level subject to the distribution of at least 90 percent of the income to their unit holders, adding that only the retained earnings are subject to taxation.
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“The distribution to unit holders is taxed as ordinary dividend income as is the case with equity investments. This conditional tax exemption helps REITs offer relatively higher yields than stocks, whose issuers must pay taxes at the corporate level before computing dividend pay-outs,” Adetiloye added. According to him, this removes the problem of double-taxation which has always been a concern to equity investors.
However, when REITs income is distributed to investors, it becomes franked investments which would not be subject to further tax. With the recent waiver of regulatory fees and stamp duty on secondary market transactions, it ensures that when any REIT is listed on the floor of the Nigerian Stock Exchange, investors can buy more units and/or exit their investment at low transaction costs.
“Real estate investment trusts, or REITs, can be a convenient way for the average investor to profit without the hassle of direct property acquisition. REITs can significantly limit personal risk. How? If an investor wanted to acquire real estate, it is likely he will take on debt by borrowing money from friends, family, or a bank. Often, he will be required to personally guarantee the funds. This can leave him exposed to a potentially devastating liability in the event the project is unsuccessful. The alternative is to come up with significant amounts of capital by reallocating his other assets such as stocks, bonds, mutual funds, and life insurance policies. Neither alternative is likely to be ideal,” said Joshua Kennon, an investment analyst.
Considering the aforementioned, developments in Nigeria’s financial services sector have proved that there is substantial value locked up in tangible long term assets, rather than short term ‘volatile’ assets –a situation which makes experts believe that financial institutions and investors should look at building a viable market out of real estate products.
