As a reflection of happenings in the global market, Africa’s Real Estate Investment Trusts (REITs) market is gaining momentum as an accessible entry point into real estate, but the continent’s largest economy is playing catch-up.
REITs are income-focused and specialised investment instruments whose market enables investors of varying sizes to gain exposure to income-producing assets without owning property directly.
These trusts, by regulation, are mandated to pay out dividends every year, which, according to Odunayo Ojo, CEO, UPDC, makes it an investment for people who want an annual income not usually affected by the volatility of the stock market and the economy at large.
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REITs have returns that are stable and predictable, and that is something that makes investors cherish them. They are suitable for investors who want regular, stable and consistent income distribution.
Globally, the REITs market has grown into a multi-trillion-dollar industry with an estimated value of $4 trillion. Reports have it that about 44 countries are enacting legislation to create REITs structures. But over 85 percent of global REITs asset value is concentrated in just five countries. Nearly 80 per cent of this asset value is in the United States.
In Africa, South Africa is the king of the REITs market, dominating the continent’s landscape with a market capitalisation of approximately $8.5 billion and about 30 REIT companies. The country controls over 95 percent of the market by reason of its market capitalization.
Nigeria, the continent’s big brother with over 200 million population, trails South Africa with just $600 million market capitalization, followed by Kenya’s $300 million. In contrast to South Africa’s 30 REIT companies, Nigeria has just three—UPDC, Union Homes, and SFS REITs.
A new report by Fortren & Company points out certain characteristics REITs operators in South Africa focus on that set them apart from other regions. The report which quotes Kola Akinsomi, an associate professor of real estate finance and investment at the University of the Witwatersandsome, listed financial discipline as a major characteristic.
Other characteristics are high reporting standards set by the Johannesburg Stock Exchange (JSE), which usually contain strict requirements to be listed on the stock exchange; end of the year reports that need to be revealed to shareholders, and discipline in terms of capital structure.
“To be able to qualify as a REIT in South Africa, operators need 75 percent of their returns to be in properties and redistributed to their shareholders. When it comes to portfolio, there is a lot of agility and liquidity in the South African REITs market,” Akinsomi explained.
“For instance, if an asset class is not doing so well, operators can either diversify, sell or even recycle it to invest in another type of asset. REITs Operators in South Africa diversify geographically to other regions of the world, which improves investment confidence and encourages exposure coming from pension funds and insurance companies. Every market is as good as the institution driving it,” the associate professor asserted.
These are strong lessons for Nigeria even as they explain further why, in Nigeria, returns on REITs have remained discouraging at 7 percent, whereas South African REITs investors get as high as 15 per cent. It is also higher in Kenya at 9 percent.
Nigeria is a curious case as far as REITs market is concerned. This is a country with large market due to its population as well as wide housing gap, yet its REITs market remains narrow, thinly traded, underdeveloped, weighed down by economic headwinds, weak policy support, and limited investor participation.
Its challenges are legion, including regulatory overlaps between the Securities and Exchange Commission, the Federal Inland Revenue Service, and the Nigerian Exchange, which create compliance headache. Without clear, harmonised rules and tax incentives, the market will remain unattractive to both foreign and domestic investors.
Liquidity is another challenge. The few listed REITs are thinly traded, making it difficult for investors to buy or sell units without steep discounts. Institutional investors such as pension funds, insurers, and sovereign wealth funds, key players in global REIT markets, largely avoid Nigeria’s REITs due to these liquidity risks.
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Nigeria’s deep-rooted preference for direct land and property ownership further hampers REITs adoption. For many Nigerians, property is considered a generational asset, best held directly rather than through securitised structures. REITs are often perceived as abstract or risky compared to the tangibility of owning land or blocks.
Besides these problems, Nigeria’s macroeconomic climate adds to the difficulties. Currency depreciation, high inflation, and interest rates north of 20 per cent make government securities more attractive than REITs. In such an environment, investors prefer safer bets like treasury bills and bonds, further starving REITs of much-needed capital.
However, all is not gloom in the Nigerian REITs market. Tajudeen Olayinka, an investment banker and stockbroker, was quoted as saying that REITs are relatively safe investments due to their regulatory framework and mandatory dividend payouts.
“Because they pay a minimum of 70 percent of their profits as dividends, REITs can be worthwhile. They may not offer rapid growth, but for income-focused investors, they are ideal,” he advised.
