The Nigerian Stock Exchange’s held its Inaugural Real Estate Investment Trust (REIT) conference in late May and stakeholders across various sectors came together once more to discuss the ways each stakeholder, from regulator to investor, will play their part in setting the Nigerian REIT sector in motion.

We have outlined 3 major areas of discussion based on the panel interviews and presentations taken at the conference and they include:

• Current Challenges
• Regulator Action Points
• Interesting Facts & Comments

A REIT is an investment vehicle that owns and manages a portfolio of income-generating real estate and are modelled after mutual funds. They use the funds of many investors to purchase and manage real estate property and/or mortgages to provide a way for individual, small and large investors to invest in large scale properties and earn a share of the income produced through real estate ownership – without actually having to go out and buy the real estate.

The current size of Nigerian REIT sector stood at c. ₦40bn ($131m at the official rate) in May 2017 through three REITs that account for less than 0.5% of the entire stock exchange. In developed countries with more advanced capital markets, REITs typically account for 2.5% – 5% of the entire stock exchange. Two REIT issuances worth over ₦33bn ($108m) failed to list between 2012 and 2014 and another with a market cap of ₦20bn ($66m) attempted an issuance earlier this year but an official response on the outcome is yet to be been published. The graphic below shows the issuance track record.

The discussion points that follow include comments from the panelists, excerpts from presentations and thoughts from the ei Team.

Current Challenges

Multiple Taxation

The current structure of Nigerian REITs is at odds with the tax efficient nature of typical REITs as the corporate tax exemptions that should be available to these entities are currently very ambiguous.

Poor Valuation Standards

Inconsistency with property valuation outcomes and lack of standards in the valuation industry make appraisals of investment grade real estate assets difficult. There are few valuers in the Nigerian market with extensive experience in valuing investment grade commercial assets and there is not sufficient data to standardize valuation outcomes and provide comfort to investors.

Shallow Asset Pipeline

The pool of available investment grade assets that have the ability to generate attractive and sustainable cashflows is shallow. This needs to deepen through the introduction of a larger number of investors that have the depth of appropriate experience to deliver quality assets and preserve and enhance values. Niyi Adeleye of Stanbic IBTC Capital rightly noted that at ₦40bn ($131m), the entire size of the Nigerian REIT sector is of less value than the price Ikeja City Mall traded during its sale in 2015.

Minimal Market Knowledge

The low level of investor familiarity with the REIT sector makes it hard for the sector to be widely accepted and adopted.

High Interest Rate Environment

The high interest rate environment (which is admittedly temporary) makes it difficult to create a case for asset classes that currently appear to be low yielding. When a risk free rate (1 Year FG Treasury Bill) is close to 23%, asset managers are unlikely to take on any additional risk for similar or less returns.

Regulator Action Points

The SEC is currently working closely with Stanbic IBTC Capital to review Nigerian REIT Rules. Ongoing engagement include discussions around treating REITs as a distinct asset class, broadening of the SEC approval process e.g. registration of consultants/valuers and providing sufficient clarity on the minimum valuation guidelines. A provision that enables SPVs transfer real estate assets between themselves to avoid fees was also mentioned.

The SEC Proposed Amendments to REITs published in early 2016 include an increase in permitted leverage levels from 25% of shareholders fund to 40% of Gross Asset Value (GAV). It loosens restrictions on foreign asset ownership by allowing a maximum of 25% GAV be invested in other African countries, an amendment which could have very positive implications because it could encourage Pan-African property investors raise capital or exit their investments in Nigeria. The amendments also provide clarity on rental income distribution guidelines, which must be at least 75% and distributed every 2 years at the minimum.

The Nigerian Stock Exchange is seeking foster transparency in REITs and Closed End Funds listed on The Exchange by introducing a requirement for them to submit key performance metrics (occupancy rates etc) on a weekly basis.

REITs and Closed End Funds listed on the Exchange have also been reclassified from the main board to a separate board specially created for them to improve awareness.

The X Issuer Portal, where listed companies typically submit quarterly financials and more, will also become easily available to the public.

The FIRS committed to taking the issue of fees & multi-taxation to the joint tax board, whose major function is to advise all tiers of Government on tax matters, and to ensure an efficient tax administration system in the country.

Ongoing engagement with the FIRS includes developing a REIT circular to clarify current tax laws and REIT regulation to modify issues required for effective tax structures.

Interesting Facts & Comments

The Ministry of Finance is aware that Nigeria currently has no legislation or regulation that specifically deals with the taxation of Real Estate Investment Trusts (REITs). They are also aware that it has resulted in a lack of clarity of REIT tax treatment. In the list of laws and regulations recommended for review and amendment within the New National Tax Policy published in Feb. 2017, the Ministry explained that Nigeria would need to create specific REIT legislation that must be enacted in lieu of using a combination of corporate income tax law, investment and securities law as well as trust law to determine the correct (and often unfavourable) treatment for REITs.

In the words of a panelist – “A new bill is required to empower the ‘tax man’ to enable REITs [properly] operate as a pass through.” This is what the Ministry of Finance has noted is the next step.

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The Land Use Act is embedded into the constitution and cannot be altered unless two-thirds of the House of Assembly vote in favour and is approved by resolution of the Houses of Assembly of not less than two-thirds of all the States. This means that a Constitutional Amendment will be necessary to change the cumbersome requirement for State Governors to give consent to land transactions in their jurisdiction, for the title perfection process to be reduced all together and for all other Land Use Act bottlenecks to be resolved. 

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Tosin Ajose of Detail Solicitors suggested that if investors were more open to investing in healthcare, student housing and similar sectors, the government may be encouraged to provide incentives [such as the REIT tax efficiency] because the investors would be helping to solve government problems.

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Erejuwah Gbadebo of Cluttons International commented that Nigerian auditors have been able to come from a low standard/low base over the years and have improved to a point where they now have the ability to operate on an international scale. Valuers however, have not been able to follow a similar trend.

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Niyi Adeleye of Stanbic IBTC Capital responded by noting that many valuers are working to close the professionalism gaps by trying to improve, adjust and expand their focus from the residential sector to a wider more holistic commercial property scope.

The conference ended with a brief address by the stock exchange who explained that more events similar to this would follow to ensure that growth in this sector is fostered.

All presentations and content from the conference are available on the Real Estate Research Report Centre.

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