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The fund manager’s report on UPDC Real Estate Investment Trust (REIT) for December 2016 showed how the performance of the Real Estate Investment Trust was affected negatively by the challenging macroeconomic environment particularly as Victoria Mall Plaza 1 (VMP-1), which was occupied by Mobil Nigeria Limited until October 2015, remains vacant and not generating income.
UPDC Real Estate Investment Trust is a real estate investment trust which invests at least 75percent of its assets directly in quality real estate (land and/or properties) in strategic locations across Nigeria.
Although the allocation to Real Estate asset class exceeds the target minimum of 75percent, the allocation to liquid asset exceeds the maximum investment of 10percent, the fund managers noted.
The Real Estate assets held by the UPDC REIT with the current rental yield and the class of tenants currently occupying the assets are: Abebe Court with current yield of 5.40percent and vacancy rate of 11.54percent; Victoria Mall Plaza Phase-1 with current yield of 5.90percent and vacancy rate of 100percent.
Others are: Victoria Mall Plaza Phase 2 (6.50percent yield and zero vacancy rate); UAC Office Block (6.40percent yield and 13.72percent vacancy rate); and 1-2 Factory Road Aba with current yield of 6.40percent and zero vacancy rate.
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The fund managers to UPDC REIT –FSDH Asset Management Limited noted that the property manager (UACN Property Development Company Plc) works to ensure that VMP 1 and other vacant spaces/flats are occupied and generating income.
The REIT has earned a total of N1.59billion, which has resulted in an earnings yield of 5.9percent as at December 31, 2016. In line with the REIT’s Trust Deed, which requires the payment of 90 percent of the REIT’s income as distribution to unit holders, the total distribution to unit holders for the 12 months period amounted to N1.26billion. “This represents 90percent of the realised income for the period,” the fund managers noted.
The UPDC REIT traded a total of 4.64million units in 2016 and closed at a price of N10 on December 31, 2016. The earnings yield on investment in the REIT as at December 31, 2016 was 5.9percent, according to its financials submitted at the Nigerian Stock Exchange (NSE).
The REIT net income declined to N1.844billion in 2016 from N3.354billion in 2015. Operating expenses rose to N331.943million from N282.634million in 2015; profit before tax declined to N1.512billion from a record high of N3.072billion.
Profit after tax (PAT) decreased to N1.512billion from N2.989billion. The asset allocation rate of UPDC REIT shows Real Estate Assets (79.84percent); Real Estate Related Assets (2.73percent); and Liquid Assets (17.44percent).
This is as a result of the inability to find qualifying real estate or real estate related assets that met UPDC REIT’s requirements. In order to ensure that the target asset allocation is achieved, we will continue to seek additional investments in real estate or real estate related assets, in the next financial year.
In addition, the projections during the initial public offer of the REIT had assumed that the properties purchased by the REIT between 2014 and 2015 would be sold in 2016, and would generate some income.
The expected income on the assumed sale will not come in as the REIT was unable to acquire additional properties between 2014 and 2015, partly due to the macroeconomic environment and also because the fund manager could not identify qualifying assets which meets the REITS benchmark returns.
In order to compensate for the unearned rental income on VMP1, the Fund Manager in consultation with the Investment Committee decided to discontinue the sale of units of Abebe Court as the property is currently fully tenanted and generating rental income.
This implies that the REIT would not earn any capital appreciation on sale of property in 2016 and rental income on VMP1, as assumed in the projections. These resulted in a negative variance of 58.37percent between the projected income and actual income earned by the REIT as at June 30, 2016.
The real estate market was adversely affected by the economic recession as a number of new developments recorded slower take-up rate and rental income lowered, as tenants are requesting for a downward review of rent or a rent-free period.
The lack of access to FX on the interbank market and the continuous depreciation of the Naira on the parallel market resulted to higher costs for retailers looking to fit out and restock their stores. This also resulted in higher costs for the required periodic maintenance for a commercial building.
Despite the macroeconomic challenges, Novare Lekki Mall, Onitsha Mall and Maryland Mall were completed and opened to customers in 2016. There is currently an oversupply of grade A office space. In order to attract tenants, Landlords had to reduce rental rates. There was also a shift of the demand for office spaces from the oil and gas sector to management, consulting, technology, finance and other services sector.
Iheanyi Nwachukwu
