REITs, as we know, are publicly listed Real Estate companies that own
and often actively manage property portfolios. Their activities, which
may range from raw land acquisition through to operational property
management, are largely restricted to the real estate sector. It is
usually the case that around 75% of their income must come from real
estate activities and they must also distribute the lion share of their
gross income (depending on the jurisdiction this can be as high as 90%)
in order to continue to enjoy their tax exemption.
So far, arguments in favour of REITs have been focussed on the benefits to developers; the easier access to capital and also the boost to liquidity by allowing them to unlock the value of the real estate they currently own. Benefits to the real estate market as a whole have also been highlighted as it would bring some structure and transparency to what could be a rather opaque market.
But what about the benefits to investors themselves, the public and private investors who may seek to own these shares, with the aim of cashing in on the real estate arm of Africa’s tremendous growth story? Below are four main benefits of REIT share ownership.
Liquidity
One of the key benefits of the addition of REITs to any portfolio is liquidity. Property, as a result of its heterogeneous nature is rather lumpy and suffers from illiquidity. A seller would need to find a buyer who wants exactly that type of property, size, price, and maybe even colour at the particular time the seller was trying divest. As a result of this, sales may take months to occur.
Listed REITs would instead provide a much easier entry and exit route for property investors. One would simply have to sell those shares on the exchange to exit a particular position. So whilst a stockbroker may still be necessary, sales agents and their often lofty fees would no longer be a requirement.
Valuation
Property valuation has also long been an issue, even in the developed markets of the UK and the US. There is simply no universally accepted method of property valuation and the same property valued by different advisors may result in very different prices. Now, this problem is somewhat alleviated in those markets by the fact that property prices are often influenced by the sale of comparables, data for which can easily be obtained from a consultancy such as Knight Frank or Savills. However, in developing markets such as that of Nigerian and Ghana, this information may be harder to come by and so valuations can be tricky.
The owner of the REIT share would however be saved this hassle as the value of his or her holdings would be determined by the prevailing market price. Needless to say, the share price is reflective of the market’s view of the value of the REIT’s underlying asset, measured by its Gross or Net Asset Value. Consequently, valuation stops being a mystery and the value of an investor’s holding is made more transparent.
Affordability
We would all love to be property investors, own a Kenyan shopping mall or two, a hotel in Ghana, a few high end residential properties on the Lagos Island or in Johannesburg, maybe even diversify into industrials and own a factory. Why stop there? How about a few warehouses? The truth is many of us simply cannot afford to own such a diversified real estate portfolio. Property investment is essentially capital intensive. What REITs do therefore is to make it more affordable. Owning stakes in a Nigerian REIT that focuses on the retail sector, or a Kenyan REIT which focuses on residentials allows for exposure to growth in those sectors and regions without having to fork out the incredible amounts necessary for ownership of such assets. Of course one could simply invest in a diversified REIT and therefore outsource the time consuming task of building a diversified portfolio. “REITs smell like real estate, look like bonds and walk like equity,” says Greg Whyte, an analyst at Morgan Stanley.
Steady Income or Capital Appreciation or both
As a result of their legal structure and in order to continue to enjoy their tax exemption, REITS have to distribute the bulk of their income. For investors, this means regular dividends. This is very much unlike general shares whereby returns are largely based on potential capital appreciation as dividends are often infrequent. Instead, a REIT investor would enjoy the benefits of both steady and regular income payments now as well as the potential capital appreciation realised at the time of sale. So effectively, it’s part bond, part equity and indeed part property. A win, win (and win) situation.
Across the different African markets, there are varied reasons why REIT expansion has been slow. For example in Nigeria, some SEC rules such as the limitations placed on the amount of leverage permitted as well as the non-treatment of REITs as asset backed investment securities have likely curbed REIT growth. Alex Moss, CEO of Consilia Capital- a London based real estate boutique advisory firm, argues that fundamental to the growth of REITs is the development of high quality commercial real estate assets as these form the bedrock of the steady income that are key to the high current yields which REITs are renowned for.
But of course given that REITs would help provide the capital needed to continue to develop such assets, the narrative beings to have a ‘chicken and egg’ feel to it. Nevertheless, if recent conferences on the topic held in Nigeria and Kenya are anything to go by, there appears to be a willingness to get the ball rolling further along.
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