As the curtain falls on 2019 today and individual as well as institutional investors strategise for the incoming year, one area of real estate investment that needs a rethink is the Real Estate Investment Trusts (REITs) and its strong leaning on residential properties.
Besides the slow growth of the REITs market in Nigeria 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 a few years ago, low yield from residential properties remains a major challenge.
In the developed economies of the world, especially in the US where it started in 1960, the REITs market has grown by almost 150 percent, while the market capitalization of non-US REITs has more than doubled.
Oscar Onyema, CEO, Nigerian Stock Exchange (NSE), says the two fastest-growing markets the last five to eight years are Australia and Japan, both of which have now overtaken France and the UK to be the second and third-largest global REITs markets respectively.
There have, however, been attempts to grow this market in Nigeria as could be seen 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.
But experts note that the return on investment, particularly from residential properties, is not encouraging, hence the need for portfolio diversification by investors in this market instrument.
A recent survey by Estate Intel, a data-focused and research-based real estate firm says, though it represents the largest property sector in any country, Nigerian residential assets typically produce the lowest income and rental yields between 5 and 6 percent.
The survey shows that residential properties are no longer attractive in relation to REITs yield, citing UPDC REIT which recorded the highest average rental yield at 5.19 percent between 2015 and 2018.
It dominates the Nigerian REIT industry by controlling 71.8 percent of the total investment properties owned and 52.4 percent of Nigeria REIT market capitalisation.
Union Homes REIT and Skye Shelter Fund own only residential properties, recording similarly unimpressive rental yields of 4.75 percent and 2.91 percent respectively between 2015 – 2018.
UPDC REIT, however, has a well-diversified property portfolio cutting across different sectors including residential, office, student housing, industrial and mixed-use developments and that explains the difference it makes in the market in terms of capitalization and investment yield.
The total value of investment properties and total market cap for Nigerian REITs was ₦40.8 billion as at December 2018 and ₦24.9 billion by October 2019 respectively. This attests to the slow growth of this otherwise rewarding investment asset class.
“To give you some context, Ikeja City Mall in November 2015, sold for a price higher than the current market cap of Nigerian REITs. The market cap of all Nigerian REITs accounts for 0.09 percent of the entire stock exchange much less than other REIT regimes across the world,” explained Dolapo Omidire, Founder/CEO, Estate Intel, in Lagos.
Omidire was of the view that there should be a deliberate approach towards stronger property diversification away from the residential sector. He noted that UPDC REIT’s lowest-performing assets were residential properties namely Abebe Court and Victoria Mall Plaza 1 (VMP).
These assets, according to him, have rental yields of 4.19 percent and a disappointing 2.04 percent while the company’s student housing project is now their highest yielding asset in 2019.
“We tried playing around with the portfolio and found that if UPDC REIT’s portfolio had no residential properties, its average yield will increase by 105bps to 6.79 percent. This is a marginal but meaningful increase, creating a case for a deliberate approach towards stronger property diversification away from the residential sector,” he said.
Omidire affirmed that Nigeria’s REIT industry was still very much nascent and needed as much support from the macroeconomic and regulatory environment as it could get. The industry still faces problems such as improper taxation structure, expensive assets and much more.
Ayo Ibaru, Director, Real Estate at Northcourt , also affirmed that there were, evidently, issues regarding the quality of assets available and concerns around the tax implications, suggesting that to reach performance levels of national economic significance, adjustments need to be made.
“Outside the macroeconomic challenges that need to be addressed, Nigerian REITs keen on generating higher rental yields need to make deliberate efforts towards the diversification of their portfolios, especially away from residential properties,” Omidire advised.