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Source: passiveinvestingaustralia.com
In many advanced economies, Real Estate Investment Trusts, otherwise known as REITs, are offering investors the opportunity to put their money in real estates through mutual funding. However, since its official takeoff in Nigeria 15 years ago, REITs have not exactly made the same impact as it has done in other countries. EDIDIONG IKPOTO takes a look at what REIT entails and why it has flopped in Nigeria’s real estate market
For many centuries, investors could only put their money in real estate either by out-rightly buying already built houses or by building one from scratch. For all intents and purposes, real estate was a capital-intensive venture, and anyone without adequate funds to pump into property acquisition could not reap dividends from the industry.
However, over the years, many models began to appear in the investment climate. Many of these models were primarily geared towards facilitating investment in real estate without necessarily pumping a huge sum of money for the purpose of property acquisition.
It was this experimental alternative to investing in real estate that ultimately birthed what came to be known as Real Estate Investment Trusts.
Historically, REITs started in the United States during the mid-20th century shortly after World War II. The United States Congress formally established REITs in 1960 as an amendment to the Cigar Excise Tax Extension. This provision, for the first time, allowed investors to buy shares in commercial real estate portfolios—something that was previously available only to wealthy individuals and through large financial intermediaries.

REITs, for the first time, brought the benefits of commercial real estate investment to regular people – benefits that could only be accessed via large financial intermediaries and to wealthy individuals. The groundwork for the Modern REIT Era followed with the Tax Reform Act of 1986, when REITs were given the ability to operate and manage real estate, rather than simply owning or financing it.
According to Investopedia, an online investment dictionary, a real estate investment trust is a company that owns, operates, or finances income-generating real estate.
REITs are modelled after mutual funds, and the idea is to pool the capital of numerous investors. This makes it possible for individual investors to earn dividends from real estate investments—without having to buy, manage, or finance any properties themselves.
Characteristically, properties in a REIT portfolio may include apartment complexes, data centres, healthcare facilities, hotels, infrastructure—in the form of fibre cables, cell towers, and energy pipelines—office buildings, retail centres, self-storage, timberland, and warehouses.
Most REITs have a straightforward business model. The REIT leases space and collects rents on the properties, then distributes that income as dividends to shareholders. Mortgage REITs don’t own real estates, but they finance real estate, instead. These REITs earn income from the interest on their investments.

To qualify as a REIT, a company must comply with certain provisions in the Internal Revenue Code. These requirements include primarily owning income-generating real estate for the long term and distributing income to shareholders.
The Investment and Securities Act (ISA) 2007 and the Securities and Exchange Commission Rules 2013 regulate REIT in Nigeria. Section 154 of the Act empowers the Securities and Nigerian Exchange Commission, SEC, to approve, register, and regulate collective investment schemes in Nigeria, including those that are administered as a real estate investment trust.
By the provision of Rule 509(1) of the SEC Rules, “A Real Estate Investment Trust can and shall wholly acquire and hold legal title to property or choose to hold equitable and beneficial title to such property vide a Trust Deed or such other structure as may be acceptable to SEC.”
SEC permits the real estate investment trusts to hold or acquire assets through the use of a declaration of trust whereby the legal interests in the real estate reside in the vendor and all beneficial interests are transferred to the real estate investment trust.
The first REIT in Nigeria (Skye Shelter Fund) was introduced in 2007, with a capitalisation of about $6.5m. It was officially listed on the Nigerian Stock Exchange (NSE) on 28 February, 2008. The second REIT (Union Homes REIT) was introduced in 2008, with a market capitalisation of about $40.8m.

The fund is primarily involved in acquiring investment properties which are held for capital appreciation.
By net asset value, UPDC REIT is Nigeria’s largest, and has a diversified portfolio of real estate assets in Lagos and Abuja.

However, REIT, which first surfaced in the Nigerian real estate ecosystem 15 years ago, has struggled to yield the magnitude of impact recorded in other advanced economies.
In explaining the downsides of the initiative, experts have cited structural inadequacies as primary reasons REIT has been unable to move forward in Nigeria during its 15-year experimental haul.
One of the criticisms against REIT is that it does not offer much in terms of capital appreciation. As part of their structure, they must pay 90 per cent of income back to investors. As a result, only 10 per cent of taxable income can be reinvested back into the REIT to buy new holdings. Other negatives are that REIT dividends are taxed as regular income, and some REITs have high management and transaction fees.

Another downside commonly attributed to this form of investment is REIT fraud. The SEC recommends that investors should be wary of anyone who tries to sell REITs that aren’t registered with the SEC.
Real estate investment trust fraud is not uncommon. Companies, stock brokers, financial advisors, and fraudsters often manipulate individuals into investing in risky REITs with the promise of low-risks and high returns.
It’s also a good idea to check out the broker or investment advisor who recommends the REIT. The SEC has a free search tool that allows anyone to look up if an investment professional is licensed and registered.
While speaking recently at a real estate symposium titled, “Real estate as a tool for economic development,” the Chief Executive of Landmark Africa, Paul Onwuanibe, said REIT had failed to make the desired impact on the Nigerian real estate ecosystem due to certain tax-related deficiencies.
He said, “The problem with REIT is that unless you propose a proper tax incentive for it and make sure it is easily accessible, it won’t work.”

The Chief Executive Officer of Afriland Properties, Uzor Oshogwe, said that while REIT had recorded significant successes in other parts of the world, Nigeria did not have the legal platform to handle some of the intricacies found in it.
According to her, many of the finer details about REIT in Nigeria, particularly the issue of double taxation, was yet to be ironed out. This, she said, had made most real estate practitioners wary about plunging their assets into the trust.
She said, “There’s a lot we need to address. How well are REITs doing in the economy? We all know that we have three main REITs in the country – there is Union Homes, there was the UPDC that came on board in 2013, and we are in 2022. Are you wondering why it hasn’t really taken off?
“When you think of it, what are the tax rebates you get? As it stands, we are looking at double taxation, because when they pay rent, you tax them. When you get dividends, they tax you. This is what it is, people coming together to do real estate. As an individual, I don’t have the resources to maybe build a hotel, but through Real Estate Investment Trust, I can actually buy stock, shares in real estate. If I buy shares of UPDC REIT, I get dividends because I’ve paid into that pocket of property.”
As an investment opportunity, REIT has often been criticised for its lack of capital appreciation potential, and the Afriland boss equally believes that putting one’s income-generating assets in a public pool could end up producing this undesired outcome.

She added, “It says that 90 per cent of your income should be shared. I think there is a rule that says you should distribute that income. It’s complicated, and I think that’s the reason why a lot of companies have not bought in is that the properties you put into that pocket must be active properties. These are properties that I get my revenue from and you want me to put it in a bucket and share with a million other people? What are the incentives? I didn’t see it. So, I stepped away.”
In the same vein, the Chief Executive Officer of real estate research company, Estate Intel, Dolapo Omidire, said REITs, like other investment schemes which leverages on mutual funds, had perennially been plagued by structural problems.
Omidire said, “After UPDC listed, it’s not that there has been any inactivity. People have tried REIT and failed. It means there’s a lot that needs to be fixed from the regulatory angle. Similar to REIT, tokenisation is a more tech-driven approach to try and make real estate more accessible. People are pooled together to own a portion of real estate.
“With unscrupulous individuals on the prowl for prey, the Estate Intel boss believes much work needs to be done vis-a-vis dousing the doubts of potential investors who are wary of losing their hard-earned funds to quacks and charlatans.”

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