The investment in UPDC REIT should not be compared with bank securities and Treasury Bills (T-Bills) as the Real Estate Investment Trust (REIT) is an equity REIT and the returns-on-investment (ROI) will be derived from rental income yield and capital appreciation, said Sesan Adetiloye, head of structured finance, BGL plc.
BGL plc is the co-issuing house of the initial public offering (IPO) of three billion units of N10 each in the UPDC REIT which opened February 19, 2013 and expected to close today March 28, 2013. According to Adetiloye, “the dividend yield on the REIT can be compared with the dividend yield on equities listed on the Nigerian Stock Exchange (NSE). The average dividend yield on the equities listed on the NSE for the last 3 years is 6.09percent, while the projected dividend yield for the REIT in the first year of operation is 7.80percent.”
“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”.
According to Adetiloye, this removes the problem of double-taxation which has always been a concern to equity investors. While the UPDC REIT is expected to be tax-exempt, due to the absence of specific legislation in Nigeria which grants the special status on REITs, it may be subject to taxation at the trust level. However, when this income is distributed to investors, it becomes franked investments which would not be subject to further tax. In addition, he said the waiver of regulatory fees and stamp duty on secondary market transactions ensures that when listed, investors can buy more units and/or exit their investment at low transaction costs.
“’The capital appreciation on the REIT would be from the sale of properties held by it. However, despite the sale of properties, the value of properties on the financial statement would be depreciated and as a result, we expect that the REIT would trade at a premium to the Net Asset Value (NAV), incorporating the capital appreciation’’ he said,
UPDC as a company will own 40percent of the REIT, a major stake that will continue to guarantee a steady cash flow resulting from 90percent of yearly distributable REIT income. “The extra cash proceeds from the offer will be further employed into other capital projects that will generate additional value to the shareholders” he added.
In theory, he pointed out that REITs are generally exempted 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.
Chibundu Edozie, group deputy managing director, BGL Plc said: “To meet the housing needs of Nigerians, therefore, the real estate sector is witnessing huge levels of investment. The basic needs of the market are affordable modern houses; built with quality materials and managed by experienced facility managers. All of this provides numerous opportunities for reputable developers”.
With yields on fixed income securities on the downward slope, Edozie explained that the UPDC REIT provides a competitive alternative investment class for the general populace, adding that with UPDC’s long history of pedigree and tract record, a high return is guaranteed to investors.