The Law and Practice of Real Estate Investment Trusts: With Highlights of African REIT Models

The date was 24th of November 2021

The location was Lagos Business School

The occasion was after Mr. Hakeem Ogunniran's class when he gifted all in attendance his book,

The Law and Practice of Real Estate Investment Trusts: With Highlights of African REIT Models.

And that was my first time of knowing about REITs.?

Excerpts:

REITs is an indirect real estate investment that gathers funds from a pool of investors to invest in income generating properties, and distributes shares to the investors.

The roots of REITs lie in 19th century New England, to overcome legal restriction against #RealEstate ownership by companies. The model has evolved over time and spread globally - being adopted in nearly 40 countries.

REITs are central drivers of the economic growth and development in several countries. In the U.S, Over 3.5 trillion dollars in gross assets is from REITs stocks of 145 million investors. Also, REITs contributed some 2.4 million dollars fulltime jobs to the economy in 2018, generating 148.2 billion dollars of labour income, according to Nareit, January 2021.

REITs make a special asset class as they combine the traits of real estate with features of equities. This means that they can be rated like bonds; they are stocklike and have predictable cashflow.

However, unlike Joint Venture, REITs are formed and opened to a wide, ordinary and diversified investor base.

Unlike bonds that have fixed interest rates, REITs guarantee capital appreciate as they grow over time, thus defending against inflation.

Both REITs and stocks are long-term buy and hold investments that provide steady cash flow stream for investors. However, distribution by REITs are statutorily guaranteed, unlike the dividend payments which are discretionary.

There are over 20 classes of REITs, based on investment categories, nature of assets, operational formwork, corporate structure, trading mechanisms and sector focus.

Generally, though, they have these defining attributes

1. They are statutorily obliged to pay a fixed percentage of their earnings as distribution to their unitholder.
2. Their underlying assets must be income-generating real estate, and related assets, held for medium to long term.
3. No more than 50% of their shares must be held by 5 or fewer members.
4. Their income?must be substantially derived from real estate and related activities.
5. They must maintain the prescribed portfolio mix ratio of real estate to other investments.
6. Their income is not taxable at the corporate level and all distributions are treated as allowable expenses.

Investment benefits of REITs

1. It fosters portfolio diversification, thus reducing risk and volatility.
2. The aggregate returns om REITs is usually higher than inflation in the long run.
3. REITs guarantees consistency and predictability of income?cashflow and revenue.
4. REITs enhances the process of portfolio adjustment, readjustment and realignment.
5. REITs avoid double taxation, thus increasing income available for distribution to shareholders.
6. REITs are highly regulated and managed by professionals.
7. REITs enable investors balance risks by investing in different classes of REITs.
8. REITs is a transparent investment vehicle that benefits all parties.
9. REITs allow for partial investment realisation.
10. REITs develops the real estate market.

In Africa though, REITs are relatively underdeveloped. With the African Continental Free Trade Agreement (AfCFTA) however, more African economies need to harness the potential of REITs now more than ever before.

Gladly, some African countries are already doing so - South Africa, Nigeria, Kenya, Rwanda etc.

The major challenges facing the REITs industry in Nigeria include restrictive legislation, poor knowledge and understanding of the industry, and prolonged bottlenecks created by the land use act of 1978.