Real Estate Investment Trusts (REITs) ought to provide investors with opportunity to diversify their portfolio in funds of various property types, thereby reducing investment risks and volatility, but unfortunately in Nigeria, investors shy away from this promising but underperforming asset class.
Many investors see REITs as danger-zone considering the low performance of the Nigerian Stock Exchange, which has made the asset class less exciting to investors.
This confirms the position of Najeeb Adeyemi, Head of Valuation at Lagos-based real estate consulting firm, Mustapha Ewenla & Partners, that investors shy away from REITs market because of its relatively low market value, small fragmentation and unattractive earnings figures.
“REITs companies in Nigeria have not been doing well looking at their market value and financial performance. They are struggling for survival. You can’t expect investors to put their funds in an asset class they are uncertain about” said Adeyemi.
REITs were introduced into Nigerian market 12 years ago, making it one of the oldest in Africa, but yet to gain traction in the country. It is still growing slowly despite a significant increase in the global market capitalization which an Ernest & Young report puts at approximately US$1.7 trillion, up from US$734 billion in 2010.
There have, however, been attempts to grow this market as reflected in the modest ₦2 billion Skye Shelter Fund floated in 2007. Others are Union Homes and Sun Trust which followed with ₦12 billion and ₦20 billion offerings respectively. UAC Property Development Company’s (UPDC’s) 2013 offering of ₦30 billion which declined to market capitalisation of ₦26.7 billion in May 2017 is the largest and most successful offering so far.
Nigeria’s REITs market continues to lag peers unlike South Africa that has about 50 listed REITs, even as they are one of the top performing sectors on the Johannesburg Stock Exchange. The market value of the three listed REITs on the Nigerian Stock Exchange (NSE) is less than N50 billion, accounting for less than 0.4 percent of the NSE.
In advanced stock markets like the New York Stock Exchange (NYSE), REITs account for 2.5 percent to 5 percent of total market capitalization. Doing the analysis of listed REITs in Nigeria revealed that they all returned losses year-to-date, one-year and five-year.
UPDC REITs lost 18.18 percent in value year-to-date, the biggest among peers, compared with Skye Shelter Fund (-19 percent) and Union Homes (-10 percent), underperforming the All Share Index (ASI), which has wiped off 10 percent in value.
The stocks performed poorly in their one-year return, with UPDC bottoming with 46 percent decline, followed by Skye Shelter Fund down by 14.50 percent and Union Homes, which lost 9.96 percent in value.
Going by their 5-year return, UPDC REIT lost a whopping 51 percent in value, trailed by Skye Shelter Fund down by 14.50 percent and Union Homes dropping by 14.48 percent, lagging the benchmark index that shed 24.83 percent in five years.
This therefore signals that the investors shy away from Nigerian listed-REITs because of their weak fundamentals, and most importantly, these corporates have not been posting enticing figures that could catch the interests of investors.
Union Homes REITs, which has released its 2018 scorecards, reported the lowest net asset value (NAV) of its portfolio in four years, buoyed by non-occupancy of key properties.
During the last financial year, two major properties of the Lagos-based fund manager were vacant due to major repairs on them, and this significantly weighed down on its operations given that rental income accounts for tangible cut in its investment income.
Despite decline in fund’s net asset value, the fund manager grew profit margin by 10 percent points to 65 percent in full year 2018.
Skye Shelter posted contraction in all its income segments in full year 2018. Interest income was down by 1.03 percent to N122.4 million in 2018 compared with N123.7 million in the previous year; rental income contracted 2.13 percent to N92 million in the review period.
Moreover, the firm earned no profit on disposal of investment property. This consequently lowered total income by 5.29 percent to N215 million in 2018 relative to N227 million earned in 2017.
The waned total income made net income shed some 9 percent to N152.8 million compared with N167.7 million in the previous year, and net income per unit shedding 8.2 percent to N7.64 in the review period from N8.32 in the year before.
UPDC failed to file its first-quarter, half-year and full year 2018 results with the Exchange, which is thing investors loathe as they need data to make informed decisions.
Real estate investors have always complained that there are actually no REITs in Nigeria. What the country has is a unit trust scheme with trustees, in which taxation is passed down to the investor as if he owned the property himself, said Damilola Ijalade, broker with PWAN Homes.
“Our current structure allows rental income to be taxed somewhere along the value chain, reducing investor’s return thereby making it less attractive”, he said.
Israel Odubola
