What You Should Know About Nigerian Real Estate Investment Trusts (REITs)

Real estate is a broad sector with a wide range of investment opportunities. Many real estate investors pick an alternative that enables them to invest in a property without purchasing it. In contrast, the majority of investors concentrate on buying actual properties.

Real estate is a broad sector with a wide range of investment opportunities. Many real estate investors pick an alternative that enables them to invest in a property without purchasing it. In contrast, the majority of investors concentrate on buying actual properties.

The advantages and disadvantages of investing in a REIT are covered in this article.

What are real estate investment trusts (REITs)?

Real Estate Investment Trusts (REITs) aggregate the funds of numerous investors to purchase and manage rental properties or mortgage loans.

The real estate assets of the fund’s REIT can produce capital gains and rental income for investors. Investors get dividends from the fund’s earnings. Additionally, if the market value increases, they can sell their shares at a profit.

As a result, REIT investors profit from having access to real estate assets without having to invest the generally significant sums of money needed for direct real estate investment. The advantage of not having to manage a mortgage or a piece of real estate directly is also provided by this.

When you invest in physical real estate, your main goal is to make money through rental income or by purchasing a property, holding it for a while, and then selling it for a profit or flipping it.

Real estate investment trusts in Nigeria

REITs are traded on the Nigerian Stock Exchange with regular companies (NSE). REITs can be purchased and sold through authorized stockbrokers, much like stocks and shares. Union Homes, Skye Shelter Fund, and UPDC Real Estate Investment Trust are Nigeria’s three most significant REITs.

The market for African REITs is estimated to be worth $29 billion and includes operations in Ghana, Kenya, Nigeria, and South Africa.

Nigerian REITs are among the continent of Africa’s oldest, having been launched to the market more than 12 years ago. Despite this, they haven’t taken root in the nation yet. According to EY research, the global market value of REITs is $1.7 trillion. When you invest in physical real estate, your main goal is to make money through rental income or by purchasing a property, holding it for a while, and then selling it for a profit or flipping it.

REITs are traded on the Nigerian Stock Exchange with regular companies (NSE). REITs can be purchased and sold through authorized stockbrokers, much like stocks and shares. Union Homes, Skye Shelter Fund, and UPDC Real Estate Investment Trust are Nigeria’s three most significant REITs. The market for African REITs is estimated to be worth $29 billion and includes operations in Ghana, Kenya, Nigeria, and South Africa.

Nigerian REITs are among the continent of Africa’s oldest, having been launched to the market more than 12 years ago. Despite this, they haven’t taken root in the nation yet. According to EY research, the global market value of REITs is $1.7 trillion. With only three REITs listed on the NSE, Nigeria has a modest worldwide market share compared to South Africa, with over 30 REITs listed on the JSE. Around 50 billion Naira, or 0.4 percent of the NSE, is the market capitalization of all listed Nigerian REITs.

The REIT industry confronts numerous obstacles, including a lack of industry expertise and onerous laws like the Land Use Act of 1978.

Capital

A substantial investment is necessary to purchase real estate. Investors need both initial and recurring money.

Examples of upfront capital include a deposit, legal fees, registry fees, valuation fees, and others.

If you take out a mortgage, ongoing capital includes a dependable source of income, property taxes, and maintenance costs. Purchasing several pieces of tangible real estate might drastically increase your expenses. REITs demand a significantly lower initial investment. These shares can be bought to get a feel for the market while leaving room for future investments. Due to brokerage costs, small investments in REITs may be unprofitable. As a result, you need to invest significantly to get a respectable return.

Leverage

You might be able to get finance for real estate with physical assets. Private mortgages are available, or you can apply to the National Housing Fund (NHF). Leveraged loans have a higher potential for profit than REITs. Generally speaking, REITs do not have access to financing, and when they do, the sums offered are modest.

Consider putting down 10 million Naira (20% of the purchase price) on a house that costs 50 million Naira. You will have made 2.5 million Naira if the house’s worth increases by 5% to 52.5 million Naira. If you had put the $10 million in a REIT, you would have earned the same 5% capital gain, but you would have only made a profit of 500,000 Naira. In this instance, purchasing physical property helped you to profit five times more than investing in a REIT.

Diversification

When directly owning real estate, it is doubtful that you would be able to purchase several homes at once due to the significant initial financial needs. Consequently, many of your assets might be allocated to one or two homes.

Contrarily, investing in a REIT enables you to indirectly purchase various real estate, including residential and commercial properties. Due to capital restrictions, some property types, such as hotels and malls, may no longer be available to individual investors. Still, they can now be more easily accessed through a REIT.

Convenience

Look at publicly available data and choose where to place your money when investing in REITs (or hire an investment advisor to do the work for you). The next step is to purchase REITs through a brokerage company.

Finding an estate agent, inspecting houses, haggling over pricing, setting up financing, and other steps are all part of the far more extensive process of purchasing and holding tangible assets.

Liquidity

It may take some time to find a suitable buyer who will purchase at the price you wish to sell your investment property, particularly in a weak market.

The market determines the pricing at which you purchase and sell REIT shares (which can be good or bad). You will get the equivalent amount of money shortly after selling your investments.

Property management

Physical real estate ownership necessitates self-management unless you hire a property manager. It might take a lot of time to deal with tenants and maintain the property.

You give these facets of property ownership to a professional management group when you participate in a REIT.

Control

In the case of REITs, you cede control in favor of entrusting asset management to experts. The controlling shareholders/property managers make all decisions on your behalf. When a property is sold, rented out, or improved is entirely out of your control. You can make decisions whenever you need to when you have direct property ownership.

The REIT Market in Nigeria

Nigeria’s REIT sector is still in its infancy, despite the expansion. As a result, Nigeria might not see the same benefits as other, more developed countries like the US or the UK. When it comes to owning real estate directly, the reverse is true. Returns are typically substantially higher in Nigeria than in more developed western nations.

Which one is better?

Both direct real estate investment and REIT investing have benefits and drawbacks. Investors must evaluate their choices and select the best one for them. A reasonable solution might be a mix of personally held real estate and REITs.

In terms of generating wealth, purchasing real estate may be preferable. Regarding capital preservation and a more straightforward approach to making money, REITs can be a better choice for you. Making sure you are informed and aware of the hazards is the most crucial thing to do before investing any money. Contact us today.