Hope dims on pension funds investment in real estate as valuation, liquidity limit interest

In spite of having well over N5 trillion cumulative funds under management, pension funds managers cannot invest directly into real estate development, not only because the law (Act 2014) establishing it does not allow that, but also because there are challenges of valuation and liquidity or tradability.

Real estate is a long-term investment asset class and therefore, investment is not always easily disposable when the need to do so and recoup the investment arises. “Apart from this asset class not being liquid or easily tradable, valuation is yet another issue,” Chinelo Anohu-Amazu, director-general, National Pencom Commission, who spoke at an estate surveyors’ forum in Lagos Wednesday, said.

Analysts are of the view that the pension funds with an estimated value of N5.6 trillion seemingly “lying idle in the banks” should be most profitably invested in real estate as part of efforts at bridging the country’s wide housing demand-supply gap put at 17 million units.

Nigeria has a disturbing housing situation. Its housing stock is only 11 million with just 5 percent in formal mortgage. Home ownership level is only 10 percent as against 78 percent in UK, 72 percent in US, 54 percent in China, and 92 percent in Singapore.

About 80 percent of the country’s 170 million population lives in unplanned settlements, yet Eric Fajimisi, CEO, Stanbic IBTC Pensions Manager Limited, insists pension funds cannot be invested in housing development, explaining that when the need to dispose of the property arises, the value of the house can only be derived from the value of anyone else sold within the neighbourhood.

“Contrary to the view commonly expressed almost everywhere, there is no idle pension funds; the funds are profitably invested mostly in infrastructure and housing through Real Estate Investment Trusts (REITs),” Fajimisi explained at the surveyors forum.

Even at this, challenges still remain. There are only two functional REITS in Nigeria, the UAC Property Development Company (UPDC) hybrid REITs, which was largely over-subscribed, and the Skye Shelter REITs. Chudi Ubosi, principal partner, Ubosi Eleh +Co, notes that this is a far cry from the 33 REITs in South Africa and 1100 in USA.

“The absence of REITS in itself has seriously limited the ability to invest pension funds in the real estate sector. Moreover, the existing REITS have tended to focus on the upper end of the real estate investment market and so their impact on the housing stock has been minimal,” he says.

Continuing, he says that “though the pension funds are not cut out to be social service providers, the truth is that so much investment is needed, especially at the lower end of the real estate pyramid where the demand far outstrips supply and where the greatest impact is most likely to be felt by the majority of Nigerians.”

Ubosi agrees with Fajimisi on the tradability of real estate assets, but points out that they have the advantage of being stationary; appreciating with time, being secured and visible, long term, hedge against inflation with rental income and capital appreciation while rate of tax on real estate return is moderate compared to other investments etc.

He advises that “one of the best ways to ensure integrity and accountability in investment is to use the services of the estate surveyors and valuers who are best suited and has been trained for this purpose.”