Exploring REITs potential as alternative source of real estate financing

A major constraint to the growth of the real estate sector in Nigeria is funding which industry watchers say suffers from a mismatch of short term deposit supply and long term lending demand.

The complexity and capital intensive nature of real estate developments and transactions demands proper and adequate funding different from what obtains today where investors and developers fund their projects from either own savings or loan facilities from lending institutions.

Traditional sources of financing for real estate in the country at the moment include equity and debt, real estate developers, private equity companies, insurance companies, governments, individuals, pension funds, primary mortgage institutions (PMIs), commercial banks, etc

However, “in addition to these traditional sources, Real Estate Investment Trusts (REITs) have significantly financed real estate developments in other countries”, said Olumayowa Ogunwemimo, the Managing Director, FSDH Asset Management Limited at a forum in Lagos recently.

Ogunwemimo, who was a guest speaker at the International Real Estate Federation (FIABCI) Nigeria Business Forum in Lagos recently, explained that an alternative source of financing for real estate projects such as REITs had become necessary in view of the capital intensive nature of real estate and the high cost of traditional sources of funding, especially bank loans.

“In financing real estate, key considerations are made to hedge against risks, said Tola Akinbanmi of the Real Estate Finance, Stanbic IBTC Capital, who also spoke at the forum, adding banks usually consider critical issues such availability of off-takers, location, clean land titles before loans are given.

Other considerations which are taken before financing real estate, he added, included development risks, land size which must not be less than 10,000 square metres for a retail development, experience of both the contractor and the sponsor of the project, management of the project, and asset quality.

The story is different with REITs which are a form of collective investment scheme regulated by the Securities & Exchange Commission, and pools capital from investors and uses same in the acquisition of income generating real estate, mortgage loans, or a combination of both.

As an investment instrument, REITS have many benefits including portfolio diversification which, Ogunwemimo explained, offered alternatives to equities and fixed income securities, especially for investors interested in diversification.

She explained further that REITs were relatively liquid assets (when compared to direct investment in real estate) that could be sold fairly quickly to raise cash or to take advantage of other investment opportunities.

Speaking earlier on the theme of the forum—‘Real Estate Financing in Nigeria: Modalities, Opportunities and Challenges’, Obi Nwogugu, Fund Manager at African Capital Alliance (ACA), highlighted the opportunities in the real estate sector in spite of the many challenges.

“There are opportunities in virtually all the asset classes including office building, retail, hospitality, industrial and residential real estate”, he noted, adding, “the market is growing, investors are excited about it and want to invest more”.

CHUKA UROKO