There is over $1.7 trillion of capital allocated to Real Estate Investment Trusts (“REITs”) globally as they have delivered better returns than equities and bonds over the last 45 years.
Globally, REITs are well-governed, invest largely in high-quality income-producing commercial real estate (offices, retail malls, and industrial assets), distribute over 90% of net income to investors every quarter, transact in local currency and are listed.
These global REITs are large, diversified and liquid, and have done multiple capital raises to buy assets and grow their portfolios. However, Nigeria’s REITs have not performed well.
They are small, illiquid, largely residential portfolios, that haven’t grown their portfolios since inception and only pay dividends once a year. There is a reason global REITs have performed very well whilst Nigerian REITs have not. Quite simply, Nigeria’s REITs have not copied the international rule book on REITs.
For example in the US, REITs delivered an annual return of 12 percent versus 11 percent and 7 percent for equities and bonds respectively over the last 45 years. REITs are often called a growing bond because they offer income like bonds, and income and capital growth like equities. This income and capital growth over time as contractual rentals grow annually, in line with inflation. Investors typically place REITs between bonds and equities on the risk spectrum.
The three REITs in Nigeria today have had a number of additional challenges. It appears they were created to address the liquidity requirements of the sellers. After starting, there was no subsequent strategy to make these REITs bigger and more diversified.
The REITs are largely invested in residential assets, unlike global REITs which usually target corporate tenants on longer leases. Corporate tenants are usually able to perform better in a challenging market environment. The Nigerian REITs all trade at a large discount to their equity accounting book values. It should be noted that they generate their management fees based on the accounting value of their equity, not the market value.
There is no mystery around the performance of the Nigerian real estate market because it mirrors the overall performance of the economy. In addition, if you had invested in dollars over the last few years, the performance has been woeful. A lot of investors entered the market to develop assets, but the economy turned, and prices fell. This has created an opportunity for new market entrants to establish income-producing real estate portfolios.
The Nigerian real estate market needs managers that can replicate the performance and management of global REITs, as the US$1.7 trillion of global REIT assets and attractive returns demonstrate that REITs work if global best practices are followed.
Well managed REITs also have the potential to re-ignite the broader real estate sector in Nigeria. They will allow corporates to release capital by selling their real estate assets, they can create an exit for developers, and also provide a new, liquid asset class for investors.
To meet the market opportunity, Chapel Hill Denham is launching its Nigeria Real Estate Investment Trust (“NREIT”), which will simply look to deliver a similar REIT strategy to successful global REITs. NREIT will focus on the commercial real estate sectors (offices, retail malls, and industrial assets) by buying high-quality A-grade assets, to ensure high-quality corporate tenants.
NREIT will distribute income to investors quarterly, not annually or half-yearly, and perform multiple capital raises over time to acquire more assets to grow the portfolio, which will create scale, diversification, and liquidity. NREIT has also been structured to ensure it has strong international-quality governance. Chapel Hill Denham’s management fee will be based on the market value of NREIT, not the accounting value and Chapel Hill Denham will also be investing directly in NREIT, given their confidence in the strategy and to align themselves with investors.
To deliver the strategy, Chapel Hill Denham has duly registered a N100 billion issuance programme with the Securities and Exchange Commission, with the first series targeting N20 billion. This will invest in a near term pipeline of over N120 billion A-grade commercial real estate assets, from a broader investment universe of more than N1 trillion, with further issuances to follow Series 1. NREIT will target a 20% gross annual return in Naira.
Chapel Hill Denham believes adhering to global best practice will enable NREIT to deliver a successful REIT for Nigerian investors and help re-ignite the local real estate market.
NREIT is currently fundraising for Series 1, which is expected to close in October.
