Originally written for and published in Thisday Newspapers- Tuesday November 2, 2010.
The real estate market in Nigeria has grown in great leaps and growing even further – as a large pool of investors becomes suspicious of the stock market. Real estate seems to be a visible alternative that keeps the investors relatively in control if they buy property and manage it personally or through a property manager. But how many people can buy upmarket real estate that provides required return on investment? The market recognizing this appetite and vacuum has open and avenue for people to invest in real estate bite sizes – pooling money together in a structure that enable each participant to invest in a large portfolio or singular project with an express return to each investor commensurate to their respective cash outlays. This is the essence of the emergence of Real Estate Investment Trusts (“REITS”) or Real Estate Investment Companies (“REICOS”) in Nigeria. This concept of mutual real estate investment funds started in the US many ago and has grown to constitute a fair portion of the real estate investment in the US peaking at about 1 Trillion USD value in 2010 REITS have also become very popular in many countries the world over.
Is there a Legal framework for REITS in Nigeria?
Nigeria investment and securities Act recognizes REITS as a type of Collective Investment Scheme (CIS) and the Securities and Exchange Commission (SEC) has set out specific rules concerning how REITS should function. REITS are there highly regulated by SEC with very rebost rules and a plethora of Dos and Don’ts. Given that a REITS is an incorporated entity – set up as either a trust or company under the company and Allied Matters Act.
The key things a discerning investor should know about the current rules and regulations governing the REITS market in Nigeria today are:
Taxation
In several other countries a REITS or REICO is not subject to a tax because it is deemed as a low through transaction. The ecessnce is simply that rules other countries state that REITS should distribute a certain percentage of their income (usually up to 90%), in which case the trust or company is deemed to paying out to investors and not retaining profits in anyway. Such countries have legislated that the taxman should skip the income tax from the company or trust and collect taxes only from income of the anti-holder in the REITS.
In Nigeria however, there is not yet a definite statement on tax exemption for REITS or REICOS – despite ongoing efforts by SEC and other stakeholders. They real estate investment companies are subject to Company Incomes Tax, and so are the Trusts Income Tax Act deems a Trust to be a company ffor the purpose of taxation.
Investment Rules
By SEC regulations, depending on whether the entity is a company or trust, and whether it is listed or unlisted, certain rules apply as to how pooled funds should be invested. A minimum of 70-75% of company assets must be core real estate whist 20-25% may be real estate related assets. At any rate the maximum for liquid assets (cash in a fixed deposit account for example) should be 10%.
Assets Rules
The assets acquired by a REIT must be insured and manage by a qualified Asset Manager, Also s development must be held for a minimum of 2 years before disposal. And in the case of REITS (as opposed to a REICO) the level of new development should not exceed 20% of the Fund’s Gross Assets Value. Every two years a REIT a rating and valuation report whist the RECIO files a valuation report only.
Trustees’ Role
SEC regulations have imposed s Trustee on every REIT or RECIO. Why, The Trustee is expected to protect the interest of the Unit Holder in the Scheme. The Trustee has therefore has far reaching power: underlying assets of REITS are vested in trustee; investment by the fund manager requires the consent of the trustee; Trustee is empowered by the Trust Deed to perform several functions. The flipside is that the Trustee has onerous obligations to the Unit-Holder and has to indemnify them against losses occasions by Trustee’s negligence.
How Many Unit-Holders Required?
There is always the question of whether the laws specify a minimum or maximum number of participants in the scheme. In the US for example it must be at least 100 shareholders, whist in Australia there is a prescription. The only mention of numbers in Nigeria so far is in section 153 of the investment and securities Act that refers to “two or more investors” in defining a Collective Investment Scheme.
Capitalisation Required
According to the rules, where the REIT intends to be quoted on the Stock Exchange (as opposed to being a private REIT) the minimum offer for the IPO should be N1 Billion and subsequent offers not less than N500 million.
Corporate Governance
The issue of corporate Governance is important with mutual funds in the hands of a “total stranger”. Rule 247 goes to town in this regard and does a very good job at insisting, amongst others things, that: Trusteeship and Management are separate; REITS must have investment Committees; Trustee control on behalf of unit holders; there are no deals with a company where offices of the management company own ½ of 1% of share individually or cumulatively own more than 5%; Promoters shall invest minimum 10% and that there are different levels of notifications to SEC required for certain actions by fund managers.
Unit-Holder’s Right of Redemption
Section 166 of the investment and securities Act requires that when a unit holder requests, the manager under the scheme shall within the time prescribed by SEC buy from the holder the number of units specified by the holder at the prevailing price. This section would only apply to Open Ended Funds (privately held funds different from Closed Ended Funds which are quoted on the stock market and subject to different exist modes dictated by the prevailing market regulations and conditions). This section raises the company law question of whether a company can legally repurchase its own shares, but section 154 (3) of the Investment and Securities Act creates an exception to that restriction contained Section 160-161 of companies Act. Open ended real estate investment companies can therefore repurchase their own shares.
Can a REIT Invest in properties Abroad?
The rules are clear that a Nigerian Real Estate Investment Scheme cannot invest outside Nigeria. However Section 195, of the Investment and Securities Act permits a foreign REIT with the approval of SEC to solicit for investors in Nigeria. It is of course important to reiterate that foreigners can invest in Nigerian Real Estate Investment Schemes based on our existing investment laws.
Conclusion
Several areas still need tightening: Firstly, although it seems to be the borrowed norm from other countries that 90% of income is distributed to unit-holders, the rules should be definite in this regard. Secondly, the issue of tax exemptions for REITS should be addressed as a matter of urgency. Thirdly the Land Use Act is begging for review in this regard-the steps and hurdles to title exchange are inimical to real estate development. Lastly, how would we grow the market for Mortgage REITS without a framework for property mortgages in Nigeria?
#AyuliArchives. Wanted Urgently: Legal Framework for Real Estate Investment Trusts Originally written for and published in Thisday Newspapers- Tuesday November 2, 2010. The real estate market in Nigeria has grown in great leaps and growing even further – as a large pool of investors becomes suspicious of the stock market.