Challenges and Performance of Adopting REIT Structure in Financing Real Estate in Nigeria
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Transcript of Challenges and Performance of Adopting REIT Structure in Financing Real Estate in Nigeria
Challenges and Performance of adopting REIT Structure in
Financing Real Estate in Nigeria
By Adetayo B Odunsi
BSc. Estate Management 2007, University of Lagos Nigeria
Submitted to the School of Real Estate and Planning In Partial Fulfilment of the
Requirements of the Degree of Masters of Science in Real Estate Finance and Investment
At the
Henley Business School, University of Reading
August 2011
Project Supervisor: Professor Simon Stevenson
Word Count: 10,791
A. B Odunsi 2011
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DEDICATION
I dedicate this project to my Lord, Saviour and Shepherd Jesus Christ who has made this
possible. Thank You
A. B Odunsi 2011
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ABSTRACT
Within the last decade, many more countries have embraced the concept which started in
Massachusetts in 1960 called Real Estate Investment Trusts. Japan (2001), Bulgaria (2004),
Hong Kong (2005), UK (2006), Germany (2007), Philippines (2009), Finland (2010) and
India is set to join the train soon.
Nigeria, the West African oil giant has not been un-participatory as the necessary legal and
structural framework for REITs was put in place in 2008. It is then research-worthy to
enquire into the lack of patronage of this globally acclaimed real estate finance and
investment structure.
Quantitative methods were engaged in investigating the challenges real estate and finance
professionals may be encountering in adopting the REIT structure. This produced a
consensus that the poor market conditions, lack of expertise and high conversion costs are
the major road blocks.
An empirical approach was then adopted in assessing how REITs in other emerging
economies have performed. South Africa and Turkey were selected for these tests using
vector auto-regression models to examine the responses of REIT prices to some
macroeconomic indicators. It was seen that both REITs behave quite differently. While South
African REITs were seen to be solid defensive, Turkish REITs are sensitive to interest rate
risks. However, the VAR decomposition showed that majority of changes in REITs is caused
by the REITs themselves.
These findings and review of literature go a long way in showing what professionals and
regulators must address and contend with if REITs will create a success story in Nigeria.
A. B Odunsi 2011
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TABLE OF CONTENTS
List of Exhibits………………………………………………………………………………… 6 -7
Chapter One: Introduction………………………………………………………………….. 8
Background of Study………………………………………………………………………….. 8
Economic Background…………………………………………………………………………. 9
Overview of Real Estate in Nigeria…………………………………………………………….11
Statement of Problem……………………………………………………………………………12
Justification of Study……………………………………………………………………………..12
Research questions………………………………………………………………………………12
Aims and Objectives……………………………………………………………………………..12
Organisation of the Report ……………………………………………………………………..13
Chapter Two: Literature Review……………………………………………………………..14
Real Estate Finance……………………………………………………………………………..14
Real Estate Equity Finance……………………………………………………………………..14
Shareholders’ Equity……………………………………………………………………14
Private Equity……………………………………………………………………………14
Joint Venture ……………………………………………………………………………14
Shared Ownerships……………………………………………………………………..15
Fractional Ownership……………………………………………………………………16
Time Share…………………………………………………………………………….…16
Real Estate Investment Trusts…………………………………………………………16
Real Estate Debt Finance……………………………………………………………………….16
Mortgage Loan…………………………………………………………………………..16
Project finance…………………………………………………………………………..17
Sources of Real Estate Finance in Nigeria……………………………………………………18
Primary Mortgage Institutions (PMIs) ………………………………………………..18
Secondary Mortgage Banks …………………………………………………………..18
Commercial Banks……………………………………………………………………...18
Insurance companies……………………………………………………………………19
Pension Funds…………………………………………………………………………...20
Cooperative Societies……………………………………………………………………21
The Informal Sector………………………………………………………………………21
Background of Real Estate Investment Trusts (REITs)……………………………………….21
REITs in South Africa………………………………………………………………………….....22
REITs in Turkey………………………………………………………………………….............24
REITs in Nigeria………………………………………………………………………….............24
Union Homes Hybrid REIT………………………………………………………………………27
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Financial Projections ……………………………………………………………………27
Investment Projections…………………………………………………………………..27
Performance of Union Homes Hybrid REIT……………………………………………28
Chapter Three: Research Method…………………………………………………………….29
Introduction…………………………………………………………………………………………29
Research Approaches…………………………………………………………………………….29
Qualitative Research Approach…………………………………………………………30
Quantitative Research Approach……………………………………………………….30
Mixed Research…………………………………………………………………………...31
Research Design…………………………………………………………………………………..32
Selective Sample Survey………………………………………………………………...32
Performance Analysis ……………………………………………………………….......33
VAR and VEC Models………………………………………………………………........33
Limitations of the Study……………………………………………………………….................33
Chapter Four: Data Analysis……………………………………………………………….......34
Selective Survey Sample………………………………………………………………...............34
Sources of Finance………………………………………………………………..................35
The REIT Structure………………………………………………………………..................36
Performance Analysis of Union Homes Hybrid REIT…………………………………………..37
Vector Auto-Regression Model……………………………………………………………….......38
Data Used………………………………………………………………..................................38
Similarities and Correlation……………………………………………………………….......39
Descriptive Statistics………………………………………………………………................40
VAR Analysis: Co-Integration Tests………………………………………………………….42
VAR Analysis: Lag Length Selection…………………………………………………………43
VAR Analysis: Granger Causality Tests……………………………………………………...43
Impulse Response Functions………………………………………………………………….43
VAR Decompositions…………………………………………………………………………..45
Interpretation of Results………………………………………………………………………..46
Chapter Five: Conclusion………………………………………………………………………..48
Summary…………………………………………………………………………………………….48
Conclusion and Recommendations………………………………………………………………50
Areas for further Study……………………………………………………………………………..51
References
Appendix
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LIST OF EXHIBITS
Exhibit 1.1 - Nigeria: GDP Growth………………………………………………………………..9
Exhibit 1.2 - Nigerian Population………………………………………………………………….10
Exhibit 1.3 - Key Players in the Nigerian Real Estate Market…………………………………11
Exhibit 2.1 - Mortgage outstanding as % of GDP (2006)………………………………………17
Exhibit 2.2 - Credit to core private sector…………………………………………………………19
Exhibit 2.3 - Total Insurance Business Investments (N Million)………………………………..20
Exhibit 2.4 -Total Pension Assets (N' billion)…………………………………………………….20
Exhibit 2.5 -Differences between South African PLSs and PUTs……………………………..23
Exhibit 2.6 -Summary: Comparison of South African, Turkish and Nigerian REITs…………25
Exhibit 2.7 -Tax treatment at REITs level………………………………………………………...26
Exhibit 2.8 -Tax treatment at Shareholders level………………………………………………..26
Exhibit 2.9 -Structure of REITs in Nigeria………………………………………………………..26
Exhibit 3.1 –Research Design/Structure………………………………………………………….32
Exhibit 4.1 -Type of companies surveyed………………………………………………………..34
Exhibit 4.2 - Cadre of Respondents………………………………………………………………34
Exhibit 4.3 - Respondents’ Sources of Finance…………………………………………………35
Exhibit 4.4 - Currently considering adopting REIT structure…………………………………..35
Exhibit 4.5 - Respondents encountering challenges adopting REIT structure………………36
Exhibit 4.6 - Challenges encountered in adopting REIT Structure in Nigeria………………..36
Exhibit 4.7 - Respondents considering adopting REITs in future………………………………37
Exhibit 4.8 - 3-Year Financial Projects of Union Homes Hybrid REIT………………………...37
Exhibit 4.9 - Financial Summary of Union Homes Savings and Loans Plc…………………..38
Exhibit 4.10 - Definition of variables and their data sources……………………………………39
Exhibit 4.11 - Inflation: Nigeria, South Africa and Turkey (2006:2011Q2)……………………39
Exhibit 4.12 - Inflation Rates: Correlation………………………………………………………...39
Exhibit 4.13 - Interest Rates: Nigeria, South Africa and Turkey (2006:2011Q2)…………….40
Exhibit 4.14 - Interest Rates: Correlation…………………………………………………………40
Exhibit 4.15 - REIT Index: South Africa and Turkey (2006:2011Q2)………………………….40
Exhibit 4.16 - REIT Index: Correlation…………………………………………………………….41
Exhibit 4.17 – Probability Distribution of South Africa REIT Returns………………………….41
Exhibit 4.18 - Probability Distribution of Turkish REIT Returns………………………………..42
Exhibit 4.19 - Co-integration Tests………………………………………………………………..42
Exhibit 4.20 - South African REIT Impulse Response………………………………………….44
Exhibit 4.21 - Turkish REIT Impulse Response………………………………………………….45
Exhibit 4.22 - South Africa: VAR Decomposition……………………………………………….46
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Exhibit 4.23 - Turkey: VAR Decomposition……………………………………………………46
Exhibit 5.1 - Summary of Survey findings……………………………………………………..48
Exhibit 5.2 - Ranking of Challenges to adopting REIT structure in Nigeria………………..49
Exhibit 5.3 - Summary of VAR Analysis findings………………………………………………50
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CHAPTER ONE: INTRODUCTION
Background of Study
The purpose of this study is to investigate the challenges of adopting the Real Estate
Investment Trust (REIT) structure in financing real estate in Nigeria. The study further aims
at assessing the performance of REITs in other emerging economy with a consideration at
making inferences to the Nigerian situation.
Globally, indirect investment in Real estate has become a major medium through which real
estate finance is readily sourced. While there are various real estate securities and indirect
real estate classes, Real Estate Investment Trusts (REITs) in particular is a key indirect real
estate class and forms an important part of investors’ diversified portfolios (Aktan and Ozturk,
2008).
In 2008 due to the agitations and moves made by the Nigerian Security and Exchange
Commission (SEC), The Nigerian Investments and Securities Act 2007 (ISA 2007) was
passed into law by the government. This legislation provided the legal and organisational
framework for investment in real estate using the REIT structure in Nigeria. It also further
provided for Real Estate Investment companies (REICs).
This structure is laced with benefits to both investors and real estate/finance professionals
who are seeking new media to finance their real estate developments, loans and mortgages.
To Investors, REITs provide a way to invest in real estate without actively owning a property.
It also helps bring a great level of professionalism and transparency to real estate
investment. This is because REIT managers must be skilled, experienced real estate finance
professionals who have been approved and registered with the Securities and Exchange
Commission (SEC). REIT’s Performance is monitored regularly by analysts, auditors and
SEC. Institutional Investors also find REITs attractive as they have been shown to provide
portfolio diversification benefits thereby reducing overall portfolio risk.
To Real estate professionals REITs are a means of generating stable and long-term capital
for real estate transactions. In addition, the ISA 2007 provides significant tax advantages for
Nigerian REITS (N-REITs) which further make them a beneficial source of capital for real
estate financiers and developers.
It is thus interesting to note that there is only one listed REIT in the country- Union Homes
Hybrid REIT.
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Economic Background
Nigeria is located in the western part of Africa, bordering the Gulf of Guinea, between Benin
and Cameroun at 10 00 N, 8 00 E and has a total area of 923,768 sq km. According to July
2011 estimates, Nigeria has a population of about 155 million people and is the fifteenth
largest producer of crude oil in the world at 2.2million barrels per day (CIA, 2011).
It also has enormous natural gas reserves, vast agricultural lands, natural resources and a
dynamic private sector. Until the mid-late 1970’s, the Nigerian economy was based on
agricultural and trading activities. Since then, it has become heavily dependent on earnings
from oil, which account for more than half of Federal Government revenue and over 90% of
export earnings. Agriculture however employs over two thirds of the population, and
accounts for a third of the GDP.
After gaining independence in 1960, the many years of military rule in Nigeria had
devastating effects on its economy. This era was characterized by haphazard economic
planning, distorted policies distorted, and undermined implementation processes as well as
corruption, fraud and general mismanagement (Mudasiru, 2001). As a result, there were
large fiscal deficits, decaying infrastructure, declining industrial capacity utilization, inefficient
public utilities, low quality of social services, external debt overhang, and significant
unemployment.
Nigeria GDP Growth
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
GDP Growth
Exhibit 1.1 Source: Global Finance 2011
A. B Odunsi 2011
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These significantly increased the transaction costs of business as well as eroded Nigeria’s
competitiveness in the sectors where it traditionally possesses comparative advantages. The
overall consequence has been stagnant economic performance, with GDP growth barely
keeping pace with the population growth rate.
Since the return to democratic governance in 1999, policies have been initiated to tackle the
problems above, and lay the foundations for sustainable economic growth. The Economic
blueprint tagged NEEDS- National Economic Empowerment Development Strategy
cumulated in the enactment of several reforms such as privatization, monetization,
deregulation, recapitalization, recertification and consolidation.
Nigerian Population
0
20
40
60
80
100
120
140
160
180
200
1980 1990 2000 2010* 2015**
Population (million)
Exhibit 1.2 Source: Global Finance 2011
Furthermore, the country took a giant step in the right direction when in 2005 the Paris club
forgave $18 billion of debt in exchange for $12 billion in payments – amounting to $30 billion
of Nigeria's total $37 billion external debt. Since 2008, the Nigerian government has shown
commitment towards market-focused reforms as directed by the IMF. These include; the
inflation reduction, modernization of the banking system, and resolving regional disputes
over the distribution of crude oil earnings.
The Nations GDP grew significantly in 2007-10 due to increased demand and global crude
prices in 2010 among other reasons. It is ranked 137 out of 183 economies for the ease of
doing business (World Bank, 2011) and a B+ rating (Standard &Poor’s, 2011)
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Overview of Real Estate in Nigeria
As in most countries, real estate continues to be a dependable source of income, a hedge
against inflation and a readily marketable commodity. The sector remains one of the most
high yielding and fastest growing sectors in the Nigerian economy.
With the return of democratic governance, the real estate sector has experienced increased
activity across the board. This is underpinned by the huge pent up demand created by
insufficient supply in the face of rising demand. For instance, the housing deficit in Nigeria
was estimated at between 14 – 17 million up from 8 million in the 1980’s (Omirin and Nubi
2007).
The recent rise in activity has largely been driven by the increasingly affluent population, the
introduction of mortgages, increased FDI and policy reforms by Federal and State
Governments. The condition of the housing sector and the supply/demand imbalance in real
estate generally has led to great opportunities in the sector.
However, as with other emerging economies scarcity and high cost of capital has been a
major issue. Major players in the Nigerian Real Estate Market include; Property
development/Investment companies, construction companies, real estate professional
service providers such as; Architects, Quantity Surveyors, Land Surveyors, Estate Valuers
and Town Planners. Real estate finance is provided by money deposit (commercial) banks,
mortgage banks, Insurance companies and Pension funds.
Key Players in the Nigerian Real Estate Finance Market
Exhibit 1.3 (Pison Housing company, 2008)
Regulators
Central Bank of Nigeria
Federal Ministry of Lands, Housing and Urban Development
Securities & Exchange
Commission
Financial Institutions
Federal Mortgage Bank of Nigeria
> 99 Primary Mortgage Institutions
24 Deposit Money Banks
Developers
Federal Housing Authority
36 State Housing Corporations
36 State Ministries of Lands, Housing & Urban
Development
> 800 Real Estate Developers
> 55 Insurance Companies
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Statement of Problem
According to Moss, the housing finance and indeed real estate finance system of most
nations consists of three markets: the primary mortgage market, the secondary mortgage
market, and the capital market. In the primary mortgage market, mortgages are created and
funds are loaned directly to borrowers. In the secondary mortgage market, lenders and
investors buy and sell existing mortgage loans and mortgage-backed securities (MBS). In
the capital market, investors buy and sell long-term investment vehicles such as REITs,
MBSs, stocks, and bonds.
If the dearth of real estate finance in Nigeria must be rebuffed, challenges that are being
faced by industry players in accessing the capital market with instruments such as REITs
must be identified and addressed.
Justification of Study
REITs where first created in the United States of America by the US Congress in 1960 for
the purpose of providing investors an opportunity to invest in real property as well as to
create liquidity for real estate developments and mortgages.
REITs have only recently surfaced in Nigeria 48 years down the line and is still yet to
generate as much awareness, research and sophistication as several other investment
instruments and sources of finance.
This research work is undertaken as one of the premier enquiries into REITs with regard to
the Nigerian context, while making inferences from other nations within Nigeria’s league who
tend to have more developed REIT markets.
Research questions
1. Are there challenges in adopting REIT Structure in financing Real Estate in Nigeria?
2. How have REITs performed in Nigeria?
3. How have REITs in other emerging markets performed?
Aims and Objectives
To evaluate the challenges of adopting the REIT structure as a means of financing real
estate in Nigeria as well as assess the performance of REITs in the country.
A. B Odunsi 2011
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Organisation of the Report
This research work is broken down into 5 chapters. These are as follows;
Chapter 1 Introduction
This chapter provides a conceptual, contextual and economic background to the research
work. It also outlines the research aim, objectives, questions and limitations.
Chapter 2 Literature Review and Theoretical Framework
The literature review discusses the major sources of real estate finance based on the two
broad categories of finance, namely; debt and equity. The discourse progresses in a
pyramid-like manner towards REITs with a focus on the structure, legal framework and
performance of REITs in South Africa, Turkey and Nigeria.
Chapter 3 Research Methodology
The methods adopted in carrying out this research work, are discussed and described here.
A mixture of qualitative and quantitative research methods was adopted and both primary
and secondary data are secured from varied sources. This was undertaken as a blend of
desk and field work.
Chapter 4 Data Analysis and Interpretation
In this chapter the results obtained in chapter three are interpreted. Inferences and
deductions are also made.
Chapter 5 Conclusion
Here a final summary of the research findings is given. A review of the research objectives is
done and in conclusion it states if these objectives have been met. Recommendations are
made and areas of further future research are also suggested.
A. B Odunsi 2011
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CHAPTER TWO: LITERATURE REVIEW
Real Estate Finance
Real estate finance can be classified into three categories; financing of land, construction
finance i.e. funding of the property built on the land, and thirdly, financing the occupation
/user of the property (Akaneme, 2011). All three categories often pose unique financing risks,
dynamics and constraints.
Real estate assets account for between 7 – 20 percent of GDP in most countries while
housing expenses account for between 15 – 40 percent of the average household monthly
expenditure (OPIC 2000). These show that real estate finance is a major feature in every
household or organisation. Irrespective of the category of real estate finance, the two main
benefits of investing in real estate are capital appreciation of the asset and rental income
(Bodie et al, 2002).
Real estate finance is the class of financing which is specific to the funding of real estate and
it’s crucial for the emergence of cities, towns and organised society. Like in general finance,
there are two broad categories of finance available, these are; debt and equity finance.
Financing of a property or real estate project by debt or equity depends on the
characteristics of asset being financed and the transaction.
Real Estate Equity Finance
Shareholders’ Equity
This is the portion of a company that is financed by common and preferred shares. It is
represented on a company’s balance sheet as its total assets minus its total liabilities.
Private Equity
These are equity securities in companies that are not publicly traded on the stock exchange.
Private equity positions are usually taken by private equity firms, venture capital firms and
angel investors to attain wide range of goals and investment strategies. Such injected equity
is usually provided to increase working capital, enable expansion and product development
or to restructure the target company’s operations, ownership or management.
Joint Venture
A joint venture is a business arrangement type in which parties agree to develop, for a finite
time, a new entity and new assets by contributing equity. The parties jointly exercise control
over the enterprise and consequently share revenues, expenses and assets. Joint ventures
A. B Odunsi 2011
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create an opportunity for companies or individuals to partner without having to merge and in
some cases helps the parties avoid debt. JVs are usually taxed as a partnership.
In real estate, joint ventures are typically structured between a Land-owner and a Developer.
The Land owner contributes his land as equity in the project while the Developer contributes
his funds and expertise in carrying out development. Each party’s income is proportionate to
its contribution and this is usually based on pre-determined terms.
In larger real estate projects, other professionals involved in the development process may
also be party to joint ventures where their professional services are seen as equity
contribution and rewarded upon completion of the project.
Shared Ownerships
Shared ownership is a contemporary method of buying stake in a property when funds are
not available for an outright purchase. Shared ownerships are very popular in European
countries where they are offered for sale by housing associations which are not-for-profit
organisations.
This is a home ownership structure where a purchaser buys a share of a property, and pays
rent on the remainder which he doesn’t own. The rent paid is called a ‘specified rent’ which
is a percentage of the fair market value on the proportion that is not owned by the purchaser.
The purchase price paid will be a percentage of the market value which corresponds with the
share to be received. The lease will typically contain a provision that allows the purchaser to
buy additional shares at anytime during the term until he owns the 100% owns the property.
This is known as “stair-casing”. The purchasers’ monthly outgoings will include repayments
on any mortgage taken out, plus rent on the part of the property retained by the housing
association.
Fractional Ownership
Fractional ownership is an investment structure where the investor owns part/fractions of the
title of an asset. As such, when the asset increases in value, so does the value of the shares
in the investment. Fractional ownership fragments a property into more affordable units for
individuals and also matches an individual's ownership time to their actual usage time.
Fractional ownership has been in practice for many years; when family and friends shared
ownership of vacation property, aircrafts, sports cars and other expensive assets. The
fractional property industry started in the US in the early 1990s when it was realised that
A. B Odunsi 2011
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people did not want to out-rightly purchase whole homes in the Rocky Mountains Ski
Resorts since they would only use it for just a few weeks a year.
Time Share
A timeshare is a type of ownership or right to the use of a property where different people
own allotments of time to use the same property. This model is often applied to
condominiums, homes, resort properties and camp grounds. Owners can decide to use their
usage time, rent it out, give it as a gift or even donate it to a charity. Owners can also
exchange their time allotments internally or externally with other allotment holders or sell
their time share out-rightly.
Real Estate Funds
A real estate fund is a mutual fund that invests primarily in real estate to produce income and
capital gains for its holders. The real estate funds industry has experience phenomenal
growth both numerically and in value appreciation of funds over the last 15 years (Deloitte,
2010)
Real Estate Investment Trusts
Individuals can invest in REITs either by purchasing their shares directly on an open
exchange or by investing in a mutual fund that specializes in public real estate. An additional
benefit to investing in REITs is the fact that many are accompanied by dividend reinvestment
plans (DRIPs). Among other things, REITs invest in shopping malls, office buildings,
apartments, warehouses and hotels. Some REITs will invest specifically in one area of real
estate - shopping malls, for example - or in one specific region, state or country. Investing in
REITs is a liquid, dividend-paying means of participating in the real estate market.
Real Estate Debt Finance
Mortgage Loan
A mortgage loan is a loan to purchase a property whereby the loan is secured by the
purchased property. Mortgages are a major source of funding for the occupation of houses,
offices and retail space all over the world. According to the 2001 census in England, 29% of
the populace owned their homes outright while 39% financed their homes with a mortgage
(UK, National Office of Statistics). Construction mortgages have also gained popularity in
financing the construction of developments where the loan is secured by the constructed
property.
A. B Odunsi 2011
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Boleat (2008) postulates a strong correlation between economic development and the size
of the mortgage market.
Mortgage outstanding as % of GDP (2006)
2%
2%
4%
14%
18%
23%
37%
60%
52%
68%
86%
72%
90%
0% 20% 40% 60% 80% 100%
Morocco
Nigeria
India
Korea
Thailand
Malaysia
Taiwan
Hong Kong
Germany
Singapore
USA
UK
Denmark
Mortgage Outstanding as % of GDP
Exhibit 2.1 Source: Saravanan (2007) and Akinwunmi et al (2008)
Project finance
Wynant (1980) defined project finance as “a financing of a major independent capital
investment that the sponsoring company has segregated from its assets and general
purpose obligations”. Furthermore, the World Bank defines project finance as the “use of
nonrecourse or limited-recourse financing.” Project finance is non-recourse as the lenders
are repaid strictly from the proceeds of the project or, in the event of failure of the project,
from the value of the project’s assets.
Project finance is usually adopted for capital intensive projects and it predates corporate
finance where permanent capital is entrusted to Managers who would decide between
paying dividends and reinvestment at the end of every financial period.
Apart from infrastructure and industrial projects, complex real estate projects such as
shopping centres, hotels, office blocks and multi-level car-parks are often funded through
project finance.
A. B Odunsi 2011
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Sources of Real Estate Finance in Nigeria
Though fragmented and scarce, there are varied sources where debt or equity capital can be
raised to finance real estate transactions in Nigeria.
Primary Mortgage Institutions (PMIs)
These are called Mortgage Banks or Savings and Loan Associations in several parts of the
world. In Nigeria, the promulgation of the Mortgage Institutions Decree No. 53 of 1989
provided the regulatory framework for the establishment and operation of PMIs by the
private sector. According to the Decree PMIs are to mobilize savings from the public and
grant housing loans to individuals. As at January 2011 there were 101 PMIs in Nigeria
however over 50% of them are located in Lagos metropolis.
Secondary Mortgage Banks
The major Secondary Mortgage Bank in Nigeria is the Federal Mortgage Bank of Nigeria
(FMBN) started operation in 1977. It was given the mandate to carry out the following main
functions: The provision of long term credit facilities to mortgage institutions in the country,
the encouragement and supervision of the activities of the mortgage institutions, provision of
long term loan to individual and property developers for house building, produce saving
facility and to carry out research on mortgage finance. These activities have however been
marred by administrative ineptitude, political instability and uncoordinated policies
(Akinwunmi 2008)
Commercial Banks
These are financial institutions and intermediaries that provide transactional, savings, and
money market accounts for customers. Commercial banks in Nigeria are largely retail by
operation. They often only lend on short-term basis because they have to meet withdrawal
requests of depositors at the shortest notice. This has not been compatible with real estate
finance as real estate requires long term finance thereby limiting the success of commercial
banks in this regard.
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Insurance companies
Insurance companies play an important role as providers of capital for real estate from an
equity (owner) standpoint. Insurance companies lend to PMIs or commercial banks then lend
to the end borrower. Typically, Insurance companies normally specialize in large-scale
projects and mortgage packages or make time-deposits.
Insurance companies generate liquidity from the payment of premiums by their policyholders
and since both the inflow of premiums and the outflow of claim payments can be predicted
with reasonable accuracy, they are able to invest in higher yielding assets.
In the US, Insurance companies have historically invested between 25 and 30% of their
assets in mortgages while they have invested an average of 21% in real estate and
mortgages in Nigeria.
Credit to core private sector
Year 2006 2007 2008 2009
% % % %
1 Priority sector 30.30 25.90 26.20 24.50
Agriculture 2.20 3.20 1.40 1.40
Solid minerals 10.10 10.70 11.30 12.30
Exports 1.20 1.40 1.00 0.50
Manufacturing 16.90 10.40 12.50 10.30
2 Less preferred sectors 46.20 41.20 42.00 45.50
Real estate 5.90 6.20 6.20 8.00
Public utilities 0.90 0.60 0.60 0.80
Transportation and Communication
7.60 6.80 7.20 8.00
Finance and Insurance 4.60 9.40 9.50 12.70
Government 4.50 3.70 1.90 3.60
Imports and Domestic Trade 22.50 32.90 31.80 12.40
3 Unclassified 23.70 32.90 31.80 30.00
Total 100 100 100 100
Exhibit 2.2 (Central Bank of Nigeria, 2010)
A. B Odunsi 2011
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Total Insurance Business Investments (N Million)
0 40,000 80,000 120,000
Govt. Securities
Stocks & Bonds
Real Estate & Mort.
Policy & Other Loans
Cash Deposits & Hand
Bills Of Exchange.
2006
2005
2004
2003
2002
Exhibit 2.3 Source: National Insurance Commission, 2008
Pension Funds
On the 25th June, 2004, the Pension Reform Act 2004 was enacted by the Nigerian
government ordering every form of employment to mandatorily participate in the
Contributory Pension Scheme for payment of retirement benefits of its employees. With
about 26 registered PFAs in Nigeria and less than 10% of Nigeria’s working population
signed on to the pension scheme, there are significant opportunities for growth in the
country’s pension industry (BGL, 2010)
Total Pension Assets (N' billion)
47
121
265
815
1072
1300
0 500 1000 1500
2004
2005
2006
2007
2008
2009 sept
Total Pension Assets (N' billion)
Exhibit 2.4 Source: Pencom, 2010
A. B Odunsi 2011
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The Pension Fund Administrators (PFA) collects funds from employers and employees
towards their retirement. This gives them access to long term funds and put them in good
position to finance real estate development. However, the Nigerian pension reform is
modelled after the Chilean Pension law as such there are significant restrictions on investible
assets of pension funds which include embargo on direct investment in real estate.
Cooperative Societies
Cooperative societies pool individual members’ resources from where soft loans are
advanced to their members. They are popularly called ‘Ajo’ in southern parts of Nigeria or
‘Esusu’ in the east. Such funds are often used in purchasing land or carrying out renovation
works on existing property.
The Informal Sector
The informal sector of an economy is classified by the extent to which the government is
functionally aware of its activities (Akanji, 1998). Nubi (2000) suggests that this sector
amounts to about 60% of Nigerian urban labour force. Profits of the informal sector are
neither taxed nor are they captured in the national income accounts. Sources of informal real
estate finance include; personal savings, family loans, individual moneylenders, informal
clubs and religious societies.
There are several investors who constantly lend money to real estate or any other form of
business venture. These investors are individuals or groups with available funds which may
range from small to large-scale, seeking mortgage ownership and equity positions in real
estate. It is thus possible to raise equity capital through syndication instead of relying solely
on mortgage funds
Background of Real Estate Investment Trusts (REITs)
A Real Estate Investment Trust is traditionally a closed-end fund created to hold real estate,
mortgages or a mixture of both (Chan et al 2003). As such there are three main classes of
REITs. These are:
Equity REITs- The trust invests strictly in real estate and generates revenue principally from
rental income and capital gains from the sale of portfolio properties.
Mortgage REITs- The trust loans money for mortgages to real estate owners or purchase
existing mortgages or MBS. Their revenue comes principally from interest earned on their
mortgage loans.
A. B Odunsi 2011
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Hybrid REITs- are REITs that investment in both real estate and mortgages being a
combination of Equity and Mortgage REITs.
REITs have transformed how real estate was traditionally financed (equity and debt) and
acted as a catalyst for the integration of real estate capital markets into general capital
markets (Oreagba, 2010). Prior to the creation of REITs, Investors could only purchase real
estate from the real estate market and this often required a large capital outlay. However
REITs allow investors to purchase units in properties on the stock market and to the tune of
the amount the investor wants to invest. While REITs traditionally were closed-ended funds,
modern variants of REITs allow them to be structured like operating companies whose major
holdings is in real estate or mortgages.
A major attraction of REITs is that it is tax exempt on the corporate level. While corporations
are taxed on their income, REITs are not. The implication of this is that investors would tend
to invest in REITs over a long period and only by taxed when selling their shares (Sebehela,
2007)
REITs in South Africa
In South Africa, there are two products that have very close resemblance to REITs as known
globally. These are Property Loan Stocks (PLS) and Property Unit Trusts (PUT). They are
both listed property vehicles are listed on the JSE under “Financials – Real Estate”.
Property unit trusts (PUT) are perhaps the more REIT-like of the two. A Property unit trust
is a portfolio of investment grade properties which generate cash-flow from the portfolio's
rental income in the short term, while the value of the units themselves increase in the longer
term, as the value of the underlying properties increase.
PUTs are managed by management companies, responsible both for the day-to-day
operation of the properties and also the trust. There are currently six listed trusts, with a total
market capitalisation of over R24-billion (APUTSA, 2011). The prices of listed PUTs are
quoted on the JSE Limited (SA) and are published in the media under the "Real Estate"
heading.
Common features between PUTs and REITs, include the distribution of income from the
property investments in the form of net rental or an interest distribution, restrictions on the
type of assets that the trust invests in (typically types of property investments); guidelines on
A. B Odunsi 2011
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the amount of income that needs to be distributed; and limitations on the level of debt on the
balance sheet. A property unit trust can borrow only 30% of its total net asset value.
According to APUTSA, PUTs are not regulated by a specific Act or regulatory framework but
rather a combination of statutes. These include;
� Johannesburg Stock Exchange (JSE) Listings requirements
� Collective Investments Schemes Control Act No.45 of 2002
� Standard Trust Deed (which is usually formed by the trustees of the trust)
On the other hand, Property loan stock companies are governed by their own memorandum
and articles of association. As with all other companies property loan stocks are subject to
the Companies Act and the JSE regulations. A significant difference between property loan
stock companies and other companies is the way its owners fund the company.
Each linked unit in a property loan stock comprises part share and part debenture
(loan). The debenture (loan) portion of the linked unit earns interest at a variable rate. The
interest comes from net income (after expenses) which the loan stock company achieves
from rental streams from the properties in which the company invests.
Usually property loan stocks distribute majority of their revenue profits through debenture
interest while the balance is paid out as a dividend. These distributions are regular, providing
steady cash stream for investors and are tax transparent.
PUTs can gear up to thirty percent of the asset value of its portfolio. PUTs must be listed on
the JSE however it is not mandatory for PLSs to get listed. There are 5 PUTs and 23 PLSs
listed on the JSE. In overall PUTs are more regulated than PLSs (Sebehela, 2007)
Differences between South African PLSs and PUTs
Property Loan Stock Property Unit Trust
Regulation Companies Act Financial Services Board
Management Internal or external External
Capital Structure Linked units (Debenture linked to shares)
Participatory units
Gearing No restrictions (Articles) Max 60% gearing
Payout ratio No restrictions (Trust deed) 100%
Representative Organisation
Property Loan Stock Association (PLSA)
Association of Property Unit Trusts (APUT)
Exhibit 2.5
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REITs in Turkey
Real estate Investment Trusts emerged in Turkey in 1995 when the Capital Markets Board
(CMB) published the “Principles Communiqué pertaining to Real estate Investment Trusts”.
In 1996, the first REIT was established and by 2003 there were 9 REITs listed on the
Istanbul stock Exchange (ISE). In 1998, the legal framework for REITs was amended and
REITs were obligated to make at least 49% of their stocks public. This new law made
Turkish REITs more institutional and transparent.
Turkish REITs are relatively liquid due to the high ratio of float to market capitalization and
the high daily transaction volume. Turkish REITs account for 1.27% of the daily turnover of
the ISE which is significantly higher than US-REITs which account for only 0.01% of the daily
turnover of the NYSE (Aydinoglu, 2004). However US-REITs have a much larger market
capitalization than Turkish REITs.
Turkish REITs must deal primarily in portfolio management. As such they must not engage
in construction, operation of hotels, shopping centres, hospitals etc, and cannot provide
services to individuals or organisations. They cannot engage in any form of banking,
commercial, industrial, or agricultural activities. Investments in foreign investments (both real
estate and capital market instruments) must not exceed 49% of the REITs portfolio value.
A REIT in Turkey may secure debt up to 3 times the net asset value of its portfolio.
REITs in Nigeria
The Investments and Securities Act of 2007 (ISA), provided the legal framework and
corporate structure for the creation of Real Estate Investment Trusts in Nigeria. This came
as a result of agitations by the Nigerian Stock Exchange (NSE) and the Securities and
Exchange Commission (SEC) to create products that provide diversification benefits for
investors in the stock market.
Section 158(1c) of the ISA 2007 provides that ‘the Commission may approve a collective
investment scheme which is administered as a real estate investment company or trust.’
According to the Act a REIT or REIC must have a minimum of 75% of its total assets directly
invested in real estate. The level of development activity which the Trust or Company may
engage in directly is pegged at 20% of its asset value while gearing is limited to 15%
A. B Odunsi 2011
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The law also requires that REITs/REICs prepare Independent valuation reports every 2
years and also the fund manager is to prepare a quarterly performance report while the
trustee is to prepare half yearly reports. A REIT is expected to provide a rating report every 2
years.
Section 195(1) of the ISA 2007 permits foreign REITs to solicit investment from Nigerian
Investors however Nigerian REITs must seek the approval of SEC to solicit investment in
any foreign collective investment (Section 195(2), ISA 2007). Under the law, Nigerian REITs
are not permitted to make investments outside Nigeria in real estate or any other asset class.
Requirements for registration of Nigerian Real Estate Investment Trusts (N-REITs) are spelt
out in Section 194 of the ISA 2007 and it states:
“A real estate investment company or trust may be registered by the commission if it: (a) is a
body incorporated under the Companies and Allied Matters Act. (b) Has a capital and
reserve as prescribed by the commission from time to time. (c) Carries on business as a
collective investment scheme solely in properties. (d) Complies with the requirement
prescribed by the Commission through its rules and regulations made from time to time.”
Requirements for the registration of units of N-REITs include but are not limited to a
minimum underwriting commitment of 35% from issuing house as well as a minimum 60%
subscription for to get SEC clearance. The REIT must have a minimum of 300 subscribers to
be listed on the Nigerian Stock Exchange.
Summary: Comparison of South African, Turkish and Nigerian REITs
South Africa Turkey Nigeria
Name Property Unit Trusts Turkish REITs Nigerian REITs
Year Started 1969 1996 2008
Number (2011) 5 13 1
Mkt. Cap. (2010) $3.4 billion $1.89 billion
Regulator Johannesburg Stock
Exchange
Capital Markets Board Securities Exchange
Commission
Legal Entity Trust Joint Stock Company Trust or Company
Min. Share Cap. 7.2 Million TRY
Activities Portfolio and property
management
Strictly portfolio
management
Portfolio mgt.,
property mgt. & devt.
Foreign
Investments
Permitted Max. 49% of Asset in
Foreign Investments
No Foreign
Investments
Debt Limit Max. 30% of NAV Up to 300% of NAV Max. 15% of NAV
Dividend
Distribution
No Limit Minimum 20% Minimum 75%
Exhibit 2.6
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Tax treatment at Shareholders level
Corporate shareholder Individual shareholder Withholding Tax
Nigeria Discounted tax Discounted tax Taxable
South Africa 12.5% 0 -10% Taxable
Turkey Taxable (20%) 50% of income subject to
tax (15 -35%)
N/A
Exhibit 2.8
Structure of REITs in Nigeria
Exhibit 2.9 (Goldman Assets, Nigeria Stock Exchange, 2009)
Tax treatment at REITs level
Income Tax Capital Gains Tax Withholding Tax
Nigeria Tax exempt on portion
distributed as dividends
Tax exempt to the extent
that they are distributed
as dividends
Taxable
South Africa Taxable (40%) Tax exempt to the extent
that they are distributed
as dividends
Tax exempt
Turkey Tax exempt Tax exempt Tax exempt Exhibit 2.7
Net Property Income Ownership of Assets
Investments in
REITs units
Principal and
Interest
Acts on Behalf of
Unit holders
Commercial
Properties
Unit Holders - Institutional Investors - Individual Investors
REIT
REIT Fund Manager
Property Manager
Property Management Services
Trustees
Debt Finance
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Union Homes Hybrid REIT
Union Homes Hybrid REIT was the first and only REIT to be created in Nigeria as at August
2011. The initial public offer was made by Union Homes Savings and Loans Plc on August
19, 2008 and Closed September 25, 2008. The company offered for subscription
970,873,787 Units at an issue price of N51.50 per unit. Investors were required to pay the
full amount of the issue price on application.
The REIT was constituted under a Trust Deed as a closed-ended unit trust scheme with
aims to achieve long-term capital appreciation of assets by investing in a portfolio of both
real estate and mortgage assets. In total, a minimum of 90% of its assets will be invested in
real estate and real estate related assets and a maximum of 10% will be invested in quality
money market instruments.
Financial Projections
As at the time of offer, the financial projects of the REIT were as follows;
YEAR I YEAR II YEAR III
N '000 N '000 N '000
GROSS INCOME 3,324,178 6,345,579 6,770,149
LESS EXPENSES 878,550 1,036,365 1,044,182
NET INCOME 2,445,628 5,309,214 5,725,967
PROVISION FOR TAX 782,601 1, 698,948 1,832,310
DISTRIBUTION @ 90% 1,496,724 3,249,239 3,504,291
UNDISTRIBUTED INCOME 166,303 361,027 389,366
EARNINGS PER UNIT (EPU) 171K 372K 401K
DISTRIBUTIONS PER UNIT (DPU) 154K 335K 361K
Investment Projections
The REIT projected to be geared up to 15% of the value of the real estate assets. A
maximum of 50% of the portfolio's assets at market value was projected to be invested in
any one real estate sub-sector with Investments ranging from N200 million to N5 billion in
size. The fund manager projected at allocating approximately 70% of the REIT's portfolio to
core investments, which are generally lower risk (already developed properties with at least
80% occupancy) while approximately 30% of its assets will be injected in value-added
properties, which are higher-yield/risk investments.
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Performance of Union Homes Hybrid REIT
According to the abridged time-table at the time of offer, the REIT was projected to be listed
by Mid-December 2008. However it wasn't until Friday 2nd July, 2010 that Union Homes
listed 250,019,781 units of 50 Naira each at N51.50 per share at the Lagos floor of the
Nigerian Stock Exchange (NSE). This shows that only about 26% of the units allotted were
subscribed for. This includes the 10% mandatory subscription of the total fund size by the
REITs sponsor as mandated by the SEC regulations guiding collective investment schemes.
As such it can be inferred that the general public subscribed to a maximum of 16% of the
REIT.
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CHAPTER THREE: RESEARCH METHODOLOGY
Introduction
The previous chapter reviewed several concepts and literature within the context of this
research endeavour. Particularly on types and sources of real estate finance as well as
REITs in Nigeria and two other emerging economies; South Africa and Turkey. This chapter
outlines the research approach, methodology and design adopted to answer the research
questions posed.
Research Approaches
There is no one-size-fits-all approach to carrying out a research work. It has often been
stated that the paradigm adopted by a researcher shapes the way he perceives the world
(Lakatos 1970, Feyeraband 1978). The choice of approach is determined by the type of
research questions posed and the type of answers these questions require. (Denzin &
Lincoln 1994; Aghaunor et al, 2002).
As stated earlier, the research questions are as follows;
4. Are there challenges in adopting REIT Structure in financing Real Estate in Nigeria?
5. How have REITs performed in Nigeria?
6. How have REITs in other emerging markets performed?
Different approaches have been taken to answer the three questions enumerated above.
Research is largely a process of theory testing and in social and behavioural sciences this
could be exploratory of confirmatory research (Onwuegbuzie and Tedlie 2003). Exploratory
research is conducted when a problem has not been clearly defined or when its scope is not
yet clear. It allows for familiarization and progressive elaboration of the problem or concept
to be studied.
Exploratory research helps determine the best research design, data collection and selection
method. An explorative investigation is appropriate when a research problem is unstructured
and difficult to de-limit (Aghaunor et al 2006). Confirmatory research is conducted where
there is a clear understanding of a problem. There is a theory and the objective of the
research is to find out if the theory is supported by the facts. The main objective of
exploratory research is theory initiation and theory building while confirmatory research
focuses on theory testing.
.
A. B Odunsi 2011
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A research may however be classified on a gamut between exploratory and confirmatory
research.
This research can be described as both exploratory and confirmatory but largely exploratory.
It explores into the performance of REITs and the challenges of adopting REIT structure,
partially confirming that there may be challenges since there is only one REIT in the country.
Any research can be classified as quantitative, qualitative or mixed method.
Qualitative Research Approach
Qualitative research entails an in-depth enquiry into human behaviour and the reasons that
govern such behavior. The qualitative method investigates the why and how of decision
making, not just what, where, when. The qualitative research paradigm has also been
described as a constructivist, naturalistic, interpretative, post-positivist or post-modern
perspective approach to research (Lincoln & Guba, 1985)
Creswell (2003) described it as an enquiry process of comprehending a social or human
problem based on building a complex holistic picture formed with words, reporting detailed
views of informants and conduced in a natural setting. In qualitative research approach;
theory and hypothesis are therefore not established prior to the research. The research
questions may change and be refined as the enquirer learns what question to ask and to
whom.
Quantitative Research Approach
Quantitative research refers to the systematic and empirical investigation of social problems
through the use of statistical, mathematical or computational techniques. The quantitative
research paradigm is also known as the traditional, positivist or empiricist research paradigm
(Creswell 2003). This method uses numerals and empirical data to describe trends,
behaviour or opinions of a population by studying a sample of that population.
Creswell (2003 and 1994) identifies some distinct characteristics of qualitative approach as
follows;
� Truthfulness or reality exists in the world and can be objectively and quantitatively
measured,
� The researcher should remain independent of that being researched to ensure an
objective assessment of the situation,
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� A deductive form of reasoning or logic is adopted wherein theories and hypothesis are
tested in cause-and-effect order. Concepts, variables and hypothesis are chosen prior to
commencement of the study and remain fixed all through.
Mixed Research
The mixed methods approach is also referred to as the integrating, synthesis, or multi-
methodology approach. This is because to a mixture of the quantitative and qualitative
research methods in one (Tashakkori and Teddlie 1998). This methodology is appropriate in
research works where it is possible to collect both quantitative and qualitative data, deeper
and more appropriate understanding of the phenomenon being researched (Creswell, 2003).
It is considered as a research design and method of inquiry that dictates the direction of the
collection and data analysis whereby the collection and analysis of data has a mix of
quantitative and qualitative research processes (Creswell and Plano Clark 2007).
The mixed method of research is the approach adopted in this work. In answering the 3
research questions, different qualitative and quantitative methods will be adopted as shown
in the table below;
Note that; Q= Questionnaire, S=Semi-structured interview, L= Literature Review, D=Data
Analysis
Research
Question
L Q S D Description
1 Are there
challenges in
adopting REIT
Structure in
financing Real
Estate in
Nigeria?
� � � �
� L- Detailed literature review of Real estate
finance and REITs in Nigeria
� Q- Questionnaires to provide information and
statistics for analysis
� S- Questions asked during semi-structured
interviews will provide broader views to
challenges and issues with REITs in Nigeria
� D- Data analysis of findings
2 How have REITs
performed in
Nigeria?
� � � �
� L- Detailed literature review on the
performance and issues of the only existing
and prospective REITs in Nigeria
� Q- Questionnaires to provide information and
A. B Odunsi 2011
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statistics for analysis
� S- Questions asked during semi-structured
interviews will provide broader views
� D- Data analysis of findings
3 How have REITs
in other
emerging
markets
performed?
�
�
� L- Detailed literature review on the framework,
structure and performance of ‘benchmark’
REITs in 2 emerging economies, namely;
South Africa and Turkey
� D- Data analysis of findings
Exhibit 3.1
Research Design
Research designs are procedures for collecting, analyzing, interpreting and reporting data in
a research work. It is important to carefully select the research design to be adopted
because it steers the entire process and determines the reasoning pattern for interpretation
of findings (Creswell and Plano Clark 2007).
Selective Sample Survey
As with most research endeavours, the population size of this research is too large and
practically impossible to be tested or assessed. This is due to various factors including
limitations in cost, time and manpower.
The population size is not only large but it is also quite daunting to determine its size in
precise terms, as the question of ‘who can adopt REIT structure?’ is posed. For the purpose
of this research, it is assumed that Mortgage banks, Venture Capitalists and Property
development and Investment companies in Nigeria make up the entire population. This is
because these are the according to the laws these are the sort of companies that may
ordinarily take up the REIT structure. Commercial banks are not included as the Central
Bank of Nigeria’s regulations prevents banks from taking large equity positions in real estate
investment which on the converse is the requirement to set up a REIT according to the ISA
2007.
As such a random sampling technique is adopted. A blend of mortgage banks, venture
capitalists and property development and investment companies are examined.
Questionnaires were sent to highest-level decision-makers in these companies and their
responses aided in answering research questions 1 and 2. Prior to administering
questionnaires, structured interviews were carried out with a few of these professionals and
A. B Odunsi 2011
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these gave valuable insight into industry perceptions and these were then use to generate
content for the questionnaires.
Performance Analysis
There are several measures available under the purview of corporate finance in measuring
the performance of companies or businesses. With available information on projections and
actual financials; variances, earnings per share, net asset value and liquidity ratios will be
calculated.
VAR and VEC Models
A Vector Auto-regression Models (VAR) describes the evolution of a set of variables over the
sample period as a linear function of only their past evolution. A VAR has more than one
dependent variable and can be considered a kind of hybrid between the uni-variate time
series models and the simultaneous–equation models (Brooks, 2010).
A vector error correction model adds error correction features to a multi-factor model such as
a vector auto regression model. This is done by creating a dynamical system where the
characteristics are deviation of the current state from its long-run relationship will be fed into
its short-run dynamics.
All multi-variable estimation problems require the researcher to address the identification
problem. With other regresion models, this required solving a sophisticated linear algebra
problem. The difficulty of this goes up geometrically with the size of the model in question.
VAR’s still require that the identification issue be addressed, but in a form that is much
easier to tackle.
Limitations of the Study
1. Due to time constraints, a small sample size of 20 real estate finance and mortgage
institutions as well as real estate investment companies were administered
questionnaires.
2. The financial statements for the only REIT in Nigeria- Union Homes Hybrid REIT were
not available; as such the necessary performance analysis could not be carried out.
3. Only two comparable countries (Turkey and South Africa) were assessed. This was due
largely to the lack of availability of information on other emerging economies that were
under consideration.
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CHAPTER FOUR: DATA ANALYSIS
Selective Sample Survey
The survey was sent out electronically to over 40 participants who are professionals in real
estate and real estate finance fields. However, within the time-frame available, 20 un-biased
responses were collected and analyzed. In comparison to the entire potential population,
this may be quite little, however, the selective sample approach that was adopted allowed for
a proper representation of the different classes of responsdents relative to the population. As
such majority of the respondents were property development companies (70%) and the
lower limit were commercial banks (5%). A consideration is that there are just 25 commercial
banks in nigeria and over 800 property deleopment companies in Nigeria (Pison Housing
Company, 2008).
Type of companies surveyed
Commercial Bank, 5%
Mortgage Bank, 20%
Venture Capital, 5%
Property Devt. /Inv. Company, 70%
Exhibit 4.1
The respondent target were decision makers in companies that have the business inclination
and structure to adopt REITs status. For the pupose of this research, these were assummed
to be Property development/invesment companies, mortgage banks, commercial banks and
venture capital firms. 50% of respondents were the Heads of their businesses while 35%
were also in top management.
Cadre of Respondents
MD/CEO 50%
Senior Management/Partner 35%
Middle Management 10%
Other 5% Exhibit 4.2
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Sources of Finance
The respondents provided information on how their companies generate funding for its real
estate developments, mortgages or both. 30% of respondents only use one source of
funding, 15% use two sources while 60% use three or more. In all 78% of the respondents
use debt, 44% use directors equity, 39% adopt joint ventures, 28% use funds from private
equity. However, non of the respondents use the REIT structure to raise capital for its
business.
Respondents’ Sources of Finance
0% 20% 40% 60% 80% 100%
Directors Equity
Other Shareholders Equity
Debt/Loans
Public Listing
Joint Venture
Private Equity
Other businesses
REIT
Sources of finance
Exhibit 4.3
The REIT Structure
While non of the respondents is currently using the REIT structure, 58% of respondents are
considering using it as a means of raising capital for real estate. 42% of the 19 respondents
to this question are not considering REITs.
Currently considering adopting REIT structure?
Yes 58%
No 42% Exhibit 4.4
Of the respondents that are currently considering adopting REITs, 80% are encountering
challenges adopting the REIT structure. 50% of the mortgage banks represented, 100% of
A. B Odunsi 2011
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commercial banks and 64% of property development/investment companies are having
challenges adopting REIT structure. None of the Venture Capital firms surveyed are
considering REITs.
Encountering challenges
Yes 80%
No 20% Exhibit 4.5
From this simple survey, the major challenge that firms are facing with respect to adopting
the REIT structure is the poor capital market condition. However, limited expertise, high
conversion costs, limited knowledge of REITs Nigeria and stringent conversion requirements
are major concerns to professionals.
Challenges encountered in adopting REIT Structure in Nigeria
0% 20% 40% 60% 80%
Limited Expertise
Poor Investor confidence
Limited knowledge of REITs
High conversion costs
Stringent conversion requirements
Timing
Poor capital market conditions
Legal framework issues
Challenges Encountered
Exhibit 4.6
75% of respondents claim that their companies will be adopting the REIT structure in future
while 25% are undecided and only 5% don’t think the will become a REIT. These figures
show a high level of appreciation for REITs and a potential sprout once all challenges are
sorted out, especially in the event of more favourable capital market conditions.
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Considering adopting REITs in future?
Yes 70%
No 5%
Undecided 25% Exhibit 4.7
Performance Analysis of Union Homes Hybrid REIT
While the forecast figures of the Union Homes REIT are readily available, it was impossible
within the period of research to secure the financial statements for Union Homes Hybrid
REIT. This created a major limitation to this study. However, it is clear that the REIT must
have faced several problems as it was scheduled to be listed by 16th December, 2008 but
only got listed 5th July, 2010. Also, at the time of listing, only 250,019,781 units were listed as
against the 970,873,787 Units offered for subscription. This represents only 26% of the units
allotted and it includes the mandatory 10% subscription of the total fund size by the REITs
sponsor as stipulated by SEC. These poor figures give indicators into the potential
performance of the REIT considering that all the capital expected to be raised was not
secured.
3-Year Financial Projects of Union Homes Hybrid REIT
YEAR I YEAR II YEAR III
N '000 N '000 N '000
GROSS INCOME 3,324,178 6,345,579 6,770,149
LESS EXPENSES 878,550 1,036,365 1,044,182
NET INCOME 2,445,628 5,309,214 5,725,967
PROVISION FOR TAX 782,601 1, 698,948 1,832,310
DISTRIBUTION @ 90% 1,496,724 3,249,239 3,504,291
UNDISTRIBUTED INCOME 166,303 361,027 389,366
EARNINGS PER UNIT (EPU) 171K 372K 401K
DISTRIBUTIONS PER UNIT (DPU) 154K 335K 361K
Exhibit 4.8
At the time of offer, the financial projects of Union Homes Hybrid REIT were very
commendable and promising; however the prevailing situation may have prevented the
realisation of these aims.
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Financial Summary of Union Homes Savings and Loans Plc
2009 N'M 2008 N'M % CHANGE
GROSS EARNING 4,402.00
6,510.00 -32.28%
PROFIT BEFORE TAX -1,315.00 -1,916.00 -31.37%
TAXATION -353.94 - 329.36 7.46%
PROFIT/LOSS AFTER TAX -1,669.00 - 2,245.00 -25.66%
BALANCE SHEET INFORMATION
FIXED ASSETS 3,869.00
2,753.00 40.54%
STOCK 73.85 5,273.00 -98.60%
TRADE DEBTORS 17.15 16.07 6.74%
CASH AND BANK BALANCE 185.95 325.53 -42.88%
OTHER DEBIT BALANCES 26,948.00 60,637.00 -55.56%
TRADE CREDITORS 37,168.00 53,223.00 -30.17%
OTHER CREDIT BALANCES 4,954.00 24,184.00 -79.52%
NET ASSETS 5,708.00 7,215.00 -20.89%
Exhibit 4.9
As earlier stated, the actual financial statements of the REIT were not secured, however the
performance of Union Homes Savings and Loans Plc, the fund manager and sponsor were
secured. This is shown in Exhibit 4.9 and clearly shows a situation of underperformance by
the parent company to the REIT.
Vector Auto-Regression Model
E-views statistical and econometrics software was utilized in producing model estimations ,
descriptive statistics and other econometric tests on rleveant data for Nigeria, South Africa
and Turkey. Due to data availability limitations, VAR analysis was carried out only on
Turkish and South African REIT returns.
Data Used
Time series data was obtained from bloomberg on two macro variables (Inflation- CPI and
Interest rates) of Nigeria, South Africa and Turkey. GPR 250 REIT indices for South Africa
and Turkey were also obtained which are representative of REIT prices in the countries.
REIT Index for Nigeria was not available.
A. B Odunsi 2011
39
Definition of variables and their data sources
Source Period Frequency Observations
Nigeria CPI IMF 2005:2011Q2 Monthly 78
S/Africa CPI IMF 2000:2011Q2 Monthly 134
Turkey CPI IMF 2006:2011Q2 Monthly 66
Nigeria Interest rate IMF 2005:2011Q2 Monthly 78
S/Africa Interest rate IMF 2000:2011Q2 Monthly 134
Turkey Interest rate IMF 2006:2011Q2 Monthly 66
Turkey Unemployment IMF 2006:2011Q1 Monthly 64
S/Africa REIT Index GPR 2005:2011Q2 Monthly 134
Turkey REIT Index GPR 2006:2011Q2 Monthly 66 Exhibit 4.10
Similarities and Correlation
Nigeria, South Africa and Turkey are all emerging economies with B, BBB and B sovereign
ratings respectively. (EIU, 2011). Inflation rates in all three countries are highly positively
correlated (Average, 0.96) while interest rates are highly correlated between South Africa
and Turkey (0.807) but low between Nigeria and South Africa (0.342).
Inflation: Nigeria, South Africa and Turkey (2006:2011Q2)
Exhibit 4.11
Inflation Rates: Correlation
Nigeria South Africa Turkey
Nigeria 1 0.960239977 0.975337085
South Africa 0.960239977 1 0.987826171
Turkey 0.975337085 0.987826171 1 Exhibit 4.12
100
110
120
130
140
150
160
170
180
I II III IV I II III IV I II III IV I II III IV I II III IV I II III
2006 2007 2008 2009 2010 2011
NIG_CPI SA_CPI TURK_CPI
A. B Odunsi 2011
40
Interest Rates: Nigeria, South Africa and Turkey (2006:2011Q2)
Exhibit 4.13
Interest Rates: Correlation
Nigeria South Africa Turkey
Nigeria 1 0.342652 0.632902
South Africa 0.342652 1 0.807078
Turkey 0.632902 0.807078 1 Exhibit 4.14
REIT Index: South Africa and Turkey (2006:2011Q2)
Exhibit 4.15
4
8
12
16
20
24
28
I II III IV I II III IV I II III IV I II III IV I II III IV I II III
2006 2007 2008 2009 2010 2011
NIG_INT_RTSA_INT_RTTURK_INT_RT
0
100
200
300
400
500
600
700
800
900
I II III IV I II III IV I II III IV I II III IV I II III IV I II III
2006 2007 2008 2009 2010 2011
SA_REIT_IND TURK_REIT_IND
A. B Odunsi 2011
41
REIT Index: Correlation
South Africa Turkey
South Africa 1 0.330194678
Turkey 0.330194678 1 Exhibit 4.16
Descriptive Statistics
The REIT returns for South Africa and Turkey were compared utilizing some descriptive
statistics to evaluate the returns distribution and their characteristics. REIT returns in both
Turkey and South Africa have relatively low standard deviations which mean REIT returns
have a low variation or dispersion from the expected average. It has a high kurtosis which is
a measure of the "peakedness" of the probability distribution of a real valued random
variable, in this case REIT returns.
Probability Distribution of South Africa REIT Returns
Exhibit 4.17
0
4
8
12
16
20
24
-0.2 -0.1 0.0 0.1 0.2
Series: REIT_RETURNSSample 2000M03 2011M05Observations 134
Mean 0.015833Median 0.027094Maximum 0.229112Minimum -0.257320Std. Dev. 0.083241Skewness -0.755545Kurtosis 4.648141
Jarque-Bera 27.91533Probability 0.000001
A. B Odunsi 2011
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Probability Distribution of Turkish REIT Returns
Exhibit 4.18
VAR Analysis: Co-integration Tests
In order to appropriately adopt a using a vector auto-regression model in estimating the
impacts of CPI and interest rates on REIT returns, a co-integration test must be done to
ensure the variables are not co-integrated (i.e. there is a long-run relationship between the
variables), otherwise a vector error correction model (VECM) may be more appropriate. In
doing this, the first difference of the REIT index, interest rate and CPI for both South Africa
and Turkey was estimated.
Co-integration Tests
Unrestricted Co-integration Rank Test (Trace)
Hypothesized Trace 0.05
No. of CE(s) Eigenvalue Statistic Critical Value Probability
None 0.093354 18.12176 29.79707 0.5571
At most 1 0.038521 5.185285 15.49471 0.7888
At most 2 7.65E-08 1.01E-05 3.841466 0.9992
Unrestricted Co-integration Rank Test (Maximum Eigenvalue)
Hypothesized Max-Eigen 0.05
No. of CE(s) Eigenvalue Statistic Critical Value Probability
None 0.093354 12.93648 21.13162 0.4581
At most 1 0.038521 5.185274 14.2646 0.7183
At most 2 7.65E-08 1.01E-05 3.841466 0.9992 Exhibit 4.19
0
2
4
6
8
10
12
14
-0.6 -0.4 -0.2 0.0 0.2
Series: REIT_DESCRIPTIVE_STATSSample 2005M12 2011M07Observations 67
Mean -0.004408Median 0.014006Maximum 0.310199Minimum -0.608993Std. Dev. 0.153880Skewness -1.246772Kurtosis 6.038080
Jarque-Bera 43.12480Probability 0.000000
A. B Odunsi 2011
43
In both cases, at 0.05 significance level the Trace and Maximum eigenvalue tests show that
there is no co-integration as shown in the results above. As such the VAR approach is
adopted to examine the relationship between REITs, interest rates and inflation (CPI) in both
South Africa and Turkey.
VAR Analysis: Lag Length Selection
A critical element in the specification of VAR models is the determination of the lag length of
the VAR. Braun and Mittnik (1993) showed that estimates of a VAR whose lag length differs
from the true lag length are inconsistent as are the impulse response functions and variance
decompositions derived from the estimated VAR. Lütkepohl (1993) also indicates that over-
fitting causes an increase in the mean-square forecast errors of the VAR and under-fitting
the lag length often generates auto-correlated errors. Hafer and Sheehan (1989) find that the
accuracy of forecasts from VAR models varies substantially for alternative lag lengths.
Researchers and statistics have often selected an appropriate lag by using an explicit
statistical criterion such as the Akaike Information Criterion (AIC) or Schwarz Information
Criterion (SIC). In this research work, the AIC was adopted and the optimal lag length
estimated was 4 and 1 for South Africa and Turkey respectively. See Appendix ** for
estimates.
VAR Analysis: Granger Causality Tests
Rather than grilling through the VAR results obtained, the much more direct Granger
causality test was used to investigate the influence of both interest rates and inflation on
REIT prices in both countries. Granger causality tests are used to test if changes in a
variable will impact on changes in other variables.
Estimations for South Africa show that neither changes in interest rate nor inflation influence
changes in REIT prices. On the other hand, REITs in Turkey are sensitive to interest rate
risks, but not inflation.
Impulse Response Functions
Impulse – Response functions estimate how typical shocks will affect a variable through time.
As such, impact of unexpected changes to interest rates and inflation on REIT prices was
investigated. For South Africa, unexpected change in interest rates would cause REIT prices
to rise temporarily (for about 6 months) and then over time (7-24 months), it has a negative
impact on prices. In Turkey, the effect is persistently negative on REIT prices. See Exhibit
4.20 below
A. B Odunsi 2011
44
South African REIT Impulse Response
Exhibit 4.20
-.020
-.015
-.010
-.005
.000
.005
.010
2 4 6 8 10 12 14 16 18 20 22 24
Response of LOG_SA_REIT_INDEX to LOG_INTEREST_RATE
-.020
-.015
-.010
-.005
.000
.005
.010
2 4 6 8 10 12 14 16 18 20 22 24
Response of LOG_SA_REIT_INDEX to LOG_CPI
A. B Odunsi 2011
45
Turkish REIT Impulse Response
Exhibit 4.21
VAR Decompositions
The variance decomposition methodology show which shocks are most important in
explaining a variable through time. This tool was adopted in examining what proportion of
unexpected changes in REIT prices is caused by shocks to the interest rates and inflation. In
South Africa, over 12 months, 99% of unexpected changes are caused by shocks to REITs.
In Turkey, the story is different; 83% is caused by its own shocks while 15% is caused by
interest rate shocks.
-.05
-.04
-.03
-.02
-.01
.00
2 4 6 8 10 12 14 16 18 20 22 24
Response of LOG_TURKEY_REIT_INDEX to LOG_INTEREST_RATE
-.05
-.04
-.03
-.02
-.01
.00
2 4 6 8 10 12 14 16 18 20 22 24
Response of LOG_TURKEY_REIT_INDEX to LOG_CPI
A. B Odunsi 2011
46
South Africa: VAR Decomposition
Period S.E. LOG_SA_REIT_INDEX LOG_INT_RATE LOG_CPI
1 0.085201 100 0 0
2 0.126704 99.95958 0.000245 0.040178
3 0.151801 99.82776 0.061973 0.110269
4 0.170621 99.81227 0.054025 0.133704
5 0.185974 99.82193 0.046073 0.131996
6 0.198623 99.83877 0.041076 0.120151
7 0.209211 99.8347 0.055978 0.109325
8 0.21818 99.80383 0.095644 0.100525
9 0.225916 99.73023 0.175551 0.094216
10 0.232727 99.60353 0.306515 0.089957
11 0.238789 99.42598 0.486519 0.087504
12 0.244248 99.19445 0.71907 0.086479 Exhibit 4.22
Turkey: VAR Decomposition
Period S.E. LOG_TURK_REIT_INDEX LOG_INT_RATE LOG_CPI
1 0.150629 100 0 0
2 0.197829 99.552 0.405005 0.042994
3 0.226585 98.59753 1.270388 0.13208
4 0.246253 97.24162 2.503508 0.254874
5 0.260629 95.59794 4.003199 0.398857
6 0.27165 93.77604 5.67131 0.552651
7 0.280418 91.87227 7.420909 0.706822
8 0.287594 89.96506 9.180728 0.854208
9 0.293595 88.11372 10.89641 0.989876
10 0.298692 86.35964 12.5295 1.110853
11 0.303068 84.729 14.05525 1.215751
12 0.306851 83.23578 15.45984 1.304376 Exhibit 4.23
Interpretation of Results
From estimations, REITs in South Africa show response to neither changes in interest rates
nor inflation. Assuming that inflation and interest rates are significant and sufficient proxies
for a countries macroeconomic situation, one may infer that South African REITs are solid
defensive stocks. Also, sudden changes in interest rates have positive short run effects on
REIT prices but grow adverse in the long run.
As for Turkish REITs, they showed sensitivity to interest rate risks but not to inflation while
unexpected changes in rates create negative effects on REIT prices. This is supported by
Erol and Tirtiroglu (2004) who showed with empirical results that Turkish REITs generally
provide a better hedge against both actual and expected inflation than do the other common
stocks listed on the Istanbul stock exchange.
A. B Odunsi 2011
47
The VAR decomposition showed that 83% of shocks are caused by shocks of the REITs
themselves while 15% is caused by interest rate shocks. Considering that both independent
variables need to be causative to infer a general macroeconomic influence, this cannot be
inferred. This situation may have more to do with the structure of Turkish REITs. For
instance, this may be due to a situation where Turkish REITs are heavily invested in
mortgage products. However this may not be so as Aydinoglu (2004) reports that a major
obstacle in Turkish real estate market is the lack of a mortgage system and long-term
financing for real estate.
A. B Odunsi 2011
48
CHAPTER FIVE: CONCLUSION
Summary
This research work has produced one of the premier and first level enquiries into REITs in
Nigeria. Considering that legislation has been passed supporting and detailing the structure
for the existence of Nigerian REITs since 2008, this investigation coming 3 years down the
line provides some valid queries on the level of acceptance this investment instrument has
received.
Real estate finance is well identified to be categorized as financing of land, construction
finance i.e. funding of the property built on the land, and thirdly, financing the occupation or
user of the property (Akaneme, 2011). However, this work reviews literature on real estate
finance based on the two major classes of finance, namely; debt and equity. As such
previous works and concepts of debt and equity types of real estate finance were examined
as well as their various sources in the subject country. This then culminated into a deeper
review into REITs, particularly on the structure and behaviour of REITs in Nigeria and two
other emerging economies; South Africa and Turkey.
A mixed research method was adopted, which means the exploration had both quantitative
and qualitative dimensions to it in order to attain a deeper and more appropriate
understanding of the phenomenon being researched (Creswell, 2003).
On the quantitative side; a selective sample survey was electronically conducted on firms
most likely to adopt or have adopted the REIT structure in financing their real estate,
mortgage or hybrid (a mix of both) transactions. These were identified within the Nigerian
context to be Mortgage banks, property development/investment companies and venture
capitalists. From an un-biased and qualified sample of 20, the following was determined:
Summary of Survey findings
All Respondents are Real estate/Mortgage Professionals
None of the Respondents have adopted REITs
Only 1 REIT exists in Nigeria
30% of respondents only use one source of funding, others mix
58% of Respondents are considering adopting REIT structure
80% considering REIT structure are having challenges adopting it
Poor capital conditions is the major challenge
Exhibit 5.1
Ranking of Challenges to adopting REIT structure in Nigeria
While the intention of the researcher was to carry out some performance analysis on the
only REIT in Nigeria- Union Homes Hybrid REIT, the financial forecasts of the REIT were
secured however the actual financials were not available as at the time of this undertaken.
This impaired a full performance measurement, however considering that only 26% of the
units offered for subscription were subscribed for and no more than 16% of this was by the
general public. Also the REIT has not been traded on the floor of the exchange since its
listing. These subtly hint at the possibility of underperformance by the REIT especially
considering that it only secured about a quarter of the capital projected to be raised.
Adopting a vector auto-regression model, the performance of REITs in two other
economies (South Africa and Turkey) were assessed using two macroeconomic variables as
proxies for economic conditions. SA REITs showed no response to neither changes in
interest rates or inflation, thereby generating a possible inference that So
are solid defensive stocks. On the other hand, Turkish REITs showed sensitivity to interest
rate risks but not to inflation. In the short run sudden changes in interest rates cause SA
REIT prices to rise temporarily but after about 6 mont
REIT prices. Interest rate shocks
further confirm the huge influence of interest rates on them
Finally, the VAR decomposition showed that majority shocks to
shocks of the REITs themselves in both Turkey and SA however in the case of Turkey 15%
of shocks are caused by interest rate shocks
need to be causative to infer a general macroeconomic
1st•Poor Capital market conditions
2nd•Limited Expertise
3rd•High conversion costs
4th•Limited knowledge of REITs
5th•Stingent conversion requirements
6th•Poor investor confidence
7th•Legal framework issues
8th•Timing
Ranking of Challenges to adopting REIT structure in Nigeria
Exhibit 5.2
the researcher was to carry out some performance analysis on the
Union Homes Hybrid REIT, the financial forecasts of the REIT were
secured however the actual financials were not available as at the time of this undertaken.
ed a full performance measurement, however considering that only 26% of the
units offered for subscription were subscribed for and no more than 16% of this was by the
l public. Also the REIT has not been traded on the floor of the exchange since its
listing. These subtly hint at the possibility of underperformance by the REIT especially
considering that it only secured about a quarter of the capital projected to be raised.
regression model, the performance of REITs in two other
economies (South Africa and Turkey) were assessed using two macroeconomic variables as
proxies for economic conditions. SA REITs showed no response to neither changes in
interest rates or inflation, thereby generating a possible inference that So
are solid defensive stocks. On the other hand, Turkish REITs showed sensitivity to interest
rate risks but not to inflation. In the short run sudden changes in interest rates cause SA
REIT prices to rise temporarily but after about 6 months it begins to have negative effects on
Interest rate shocks show a constant negative effect on Turkish REIT prices
further confirm the huge influence of interest rates on them.
Finally, the VAR decomposition showed that majority shocks to REIT prices are caused by
shocks of the REITs themselves in both Turkey and SA however in the case of Turkey 15%
of shocks are caused by interest rate shocks. Considering that both independent variables
need to be causative to infer a general macroeconomic influence, this cannot be inferred.
Poor Capital market conditions
Limited Expertise
High conversion costs
Limited knowledge of REITs
Stingent conversion requirements
Poor investor confidence
Legal framework issues
Timing
A. B Odunsi 2011
49
Ranking of Challenges to adopting REIT structure in Nigeria
the researcher was to carry out some performance analysis on the
Union Homes Hybrid REIT, the financial forecasts of the REIT were
secured however the actual financials were not available as at the time of this undertaken.
ed a full performance measurement, however considering that only 26% of the
units offered for subscription were subscribed for and no more than 16% of this was by the
l public. Also the REIT has not been traded on the floor of the exchange since its
listing. These subtly hint at the possibility of underperformance by the REIT especially
considering that it only secured about a quarter of the capital projected to be raised.
regression model, the performance of REITs in two other emerging
economies (South Africa and Turkey) were assessed using two macroeconomic variables as
proxies for economic conditions. SA REITs showed no response to neither changes in
interest rates or inflation, thereby generating a possible inference that South African REITs
are solid defensive stocks. On the other hand, Turkish REITs showed sensitivity to interest
rate risks but not to inflation. In the short run sudden changes in interest rates cause SA
hs it begins to have negative effects on
on Turkish REIT prices
REIT prices are caused by
shocks of the REITs themselves in both Turkey and SA however in the case of Turkey 15%
. Considering that both independent variables
influence, this cannot be inferred.
A. B Odunsi 2011
50
Summary of VAR Analysis findings
Nigeria, South Africa (SA) and Turkey are emerging economies
Inflation rates in all 3 countries are highly positively correlated
Interest rates are highly correlated between SA and Turkey but low
between Nigeria and SA
Turkish and South African REITs have relatively low standard deviations
SA REITs prices are neither influenced by interest rates nor inflation
Turkish REITs are sensitive to interest rate risks but not inflation.
Interest rate shocks cause SA REIT prices to rise temporarily but is
adverse over time
Interest rate shocks are persistently negative on Turkish REIT prices.
Exhibit 5.3
Conclusion and Recommendations
This research endeavour has been able to identify that a lot of Nigeria real estate and
mortgage professionals are considering adopting the REIT structure in financing their
businesses, as at present majority of them adopt more than one source of funding
depending on their different corporate finance outlooks. However, only one mortgage bank
has adopted this structure due to challenges that are being faced.
According to the research findings, the major challenge is the poor condition of the Nigerian
capital market. Also, limited expertise on REIT structuring and the high conversion costs are
some of the fears of professionals. The goes to show that real estate and mortgage players
being rationale and risk averse as an average investor want to ensure the structure, market
and expertise level is tested before they launch out.
While the first challenge may be quite daunting for regulators such as the Securities and
Exchange Commission (SEC) and the Nigerian Stock Exchange (NSE) to ameliorate, they
have major roles to play in improving expertise on REITs as well as reduction in conversion
costs. In the UK, the government is proposing scraping the 2% conversion cost on total
asset value amongst other efforts aimed at encouraging the creation of REITs (CBRE, 2011).
Similar measures need to be taken by Nigerian regulators to incubate the success of REITs
in the country.
As seen from the VAR decomposition of South African and Turkish REITs, majority of the
shocks to REITs are caused by the REITs themselves and not macroeconomic factors or
indicators. This gives an insight into the potential behaviour of Nigerian REITs being highly
A. B Odunsi 2011
51
correlated with these economies. While this is not an assertive position, it forms a basis of
investigations on N-REITs when they begin to be traded in huge volumes in the wake of
more favourable market conditions.
Areas for further Study
In further assessing the performance of REITs in other emerging economies, the influences
and impulse response functions of REITs to the All-share-Index may be determined. Such
estimation may potentially show presence of co-integration as it is expected for REITs to
have long run relationships with the all share index. However, in such a case a vector error
correction model may be utilized.
It is also the believe of the researcher that further studies may have access to data on REITs
in Nigeria and this will open up a wide spectrum of research that may be carried out ranging
from the diversification benefits of Nigerian REITs in a portfolio to assessments of their
performance in aiding to reduce the real estate finance deficit in the country, amongst others.
A. B Odunsi 2011
52
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APPENDIX
Appendix 1- Research Survey
1. What type of company are you?
� Commercial Bank � Mortgage Bank � Property Development/Investment Company
� Other ____________
2. How do you fund your real estate developments/mortgages?
� Directors Equity � Debt/Loans � Public Listing � Joint Venture � Private Equity
� Other businesses � REIT � Other _______________________________________
3. Are you currently considering adopting REIT structure in financing your real estate
developments/mortgages?
� Yes � No
4. If Yes to Question 3, are there any challenges you are encountering in adopting REIT structure?
� Yes � No
5. If Yes to Question 4, what are the challenges you are encountering in adopting REIT structure in
financing your real estate developments?
� Limited Expertise � Poor Investor confidence � Limited knowledge of REITs
� High conversion costs � Stringent conversion requirements � Timing
� Poor Capital Market conditions � Other _________________
_____________________________________________________________________________
6. Do you see your company adopting REIT structure in future?
� Yes � No
7. What is your position in your company ______________________
8. What is the name of you Company ___________________________________
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Appendix 2- VAR Optimal Lag Estimates
South Africa: VAR Lag Order Selection
Lag LogL LR FPE AIC SC HQ
0 15.83362 NA 0.000164 -0.202104 -0.134919 -0.174808
1 856.542 1628.459 3.36E-10 -13.29987 -13.03113* -13.19069
2 876.3111 37.359 2.84E-10 -13.46947 -12.99917 -13.27839*
3 888.5234 22.50128 2.70E-10 -13.52005 -12.8482 -13.24709
4 898.9588
18.73445* 2.64e-10* -13.54266* -12.66925 -13.1878
5 906.116 12.51095 2.73E-10 -13.51364 -12.43867 -13.07689
6 914.4479 14.17079 2.76E-10 -13.50312 -12.22659 -12.98448
7 918.857 7.290692 2.98E-10 -13.43082 -11.95274 -12.83029
8 925.9675 11.42157 3.09E-10 -13.40106 -11.72142 -12.71865
Turkey: VAR Lag Order Selection
Lag LogL LR FPE AIC SC HQ
0 74.03236 NA 1.95E-05 -2.32893 -2.225116 -2.288244
1 344.5014
505.4667* 3.70e-09* -10.90168* -10.48643* -10.73894*
2 346.7728 4.021543 4.63E-09 -10.68108 -9.954381 -10.39628
3 349.5636 4.666621 5.70E-09 -10.4775 -9.439361 -10.07064
4 352.3315 4.356004 7.07E-09 -10.27316 -8.923589 -9.744253
5 358.8879 9.673298 7.80E-09 -10.19304 -8.532029 -9.542077
6 363.8159 6.786178 9.16E-09 -10.05954 -8.087082 -9.286514
* indicates lag order selected by the criterion
LR: sequential modified LR test statistic (each test at 5% level)
FPE: Final prediction error
AIC: Akaike information criterion
SC: Schwarz information criterion
HQ: Hannan-Quinn information criterion
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Appendix 3- VAR Estimates
South Africa Vector Auto-regression Estimates
LOG_SA_REIT_INDEX LOG_INTEREST_RATE LOG_CPI
LOG_SA_REIT_INDEX(-1) 1.0978 -0.038254 -2.69E-05
-0.09265 -0.0416 -0.00462
[ 11.8486] [-0.91951] [-0.00582]
LOG_SA_REIT_INDEX(-2) -0.234291 -0.034594 -0.00557
-0.13767 -0.06182 -0.00686
[-1.70186] [-0.55962] [-0.81170]
LOG_SA_REIT_INDEX(-3) 0.101437 0.012902 -0.005304
-0.13864 -0.06225 -0.00691
[ 0.73167] [ 0.20725] [-0.76762]
LOG_SA_REIT_INDEX(-4) -0.019091 0.052506 0.010094
-0.09274 -0.04164 -0.00462
[-0.20587] [ 1.26094] [ 2.18373]
LOG_INTEREST_RATE(-1) 0.009475 0.851543 0.031356
-0.1982 -0.08899 -0.00988
[ 0.04781] [ 9.56846] [ 3.17409]
LOG_INTEREST_RATE(-2) 0.124951 0.409826 -0.030189
-0.26498 -0.11898 -0.01321
[ 0.47155] [ 3.44448] [-2.28586]
LOG_INTEREST_RATE(-3) -0.188713 0.002504 0.007088
-0.27346 -0.12279 -0.01363
[-0.69010] [ 0.02039] [ 0.52004]
LOG_INTEREST_RATE(-4) 0.008799 -0.328842 -0.007119
-0.20325 -0.09126 -0.01013
[ 0.04329] [-3.60329] [-0.70276]
LOG_CPI(-1) -0.613913 0.528189 1.232283
-1.86484 -0.83736 -0.09295
[-0.32920] [ 0.63078] [ 13.2578]
LOG_CPI(-2) 0.372925 -0.062574 -0.195477
-2.95854 -1.32845 -0.14746
[ 0.12605] [-0.04710] [-1.32562]
LOG_CPI(-3) 0.409852 0.566969 0.010174
-2.86636 -1.28706 -0.14287
[ 0.14299] [ 0.44051] [ 0.07121]
LOG_CPI(-4) -0.011465 -1.070007 -0.042259
-1.7924 -0.80483 -0.08934
[-0.00640] [-1.32949] [-0.47303]
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C -0.300701 0.349871 -0.016094
-0.32992 -0.14814 -0.01644
[-0.91142] [ 2.36171] [-0.97870]
R-squared 0.987553 0.980441 0.999503
Adj. R-squared 0.986287 0.978452 0.999453
Sum sq. Resids 0.856579 0.172704 0.002128
S.E. equation 0.085201 0.038257 0.004247
F-statistic 780.1695 492.9315 19780.5
Log likelihood 143.5844 248.474 536.4395
Akaike AIC -1.993656 -3.595023 -7.991442
Schwarz SC -1.708331 -3.309698 -7.706117
Mean dependent 5.766042 2.194271 4.666266
S.D. dependent 0.727572 0.260622 0.181504
Determinant resid covariance (dof adj.) 1.81E-10
Determinant resid covariance 1.32E-10
Log likelihood 932.3976
Akaike information criterion -13.63966
Schwarz criterion -12.78368
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Turkey Vector Auto-regression Estimates
LOG_TURK_REIT_INDEX LOG_INT_RATE LOG_CPI
LOG_TURK_REIT_INDEX(-1) 0.827941 0.003739 0.001673
-0.06779 -0.0209 -0.00373
[ 12.2139] [ 0.17892] [ 0.44833]
LOG_INTEREST_RATE(-1) -0.270963 0.939057 -0.00096
-0.15169 -0.04677 -0.00835
[-1.78624] [ 20.0777] [-0.11500]
LOG_CPI(-1) -0.508776 -0.147677 0.991411
-0.30946 -0.09541 -0.01703
[-1.64408] [-1.54775] [ 58.2115]
C 4.036537 0.882683 0.044201
-2.12176 -0.65419 -0.11677
[ 1.90245] [ 1.34928] [ 0.37853]
R-squared 0.833601 0.966448 0.995941
Adj. R-squared 0.825549 0.964824 0.995744
Sum sq. Resids 1.406715 0.133728 0.004261
S.E. equation 0.150629 0.046442 0.00829
F-statistic 103.5326 595.2911 5070.57
Log likelihood 33.34717 111.003 224.7326
Akaike AIC -0.889308 -3.242514 -6.688866
Schwarz SC -0.756602 -3.109808 -6.556159
Mean dependent 4.263206 3.026418 4.890562
S.D. dependent 0.360637 0.247625 0.127076
Determinant resid covariance (dof adj.) 3.11E-09
Determinant resid covariance 2.58E-09
Log likelihood 371.6638
Akaike information criterion -10.8989
Schwarz criterion -10.50078
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Appendix 4- Granger Estimates Causality/Block Exogeneity Wald Tests
Dependent variable: LOG_TURKEY_REIT_INDEX
Excluded Chi-sq df Prob.
LOG_INTEREST_RATE 3.190671 1 0.0741
LOG_CPI 2.70301 1 0.1002
All 3.23313 2 0.1986
Dependent variable: LOG_INTEREST_RATE
Excluded Chi-sq df Prob.
LOG_TURKEY_REIT_INDEX 0.032011 1 0.858
LOG_CPI 2.39554 1 0.1217
All 4.8266 2 0.0895
Dependent variable: LOG_CPI
Excluded Chi-sq df Prob.
LOG_TURKEY_REIT_INDEX 0.201003 1 0.6539
LOG_INTEREST_RATE 0.013225 1 0.9084
All 0.411564 2 0.814
Dependent variable: LOG_SA_REIT_INDEX
Excluded Chi-sq df Prob.
LOG_INTEREST_RATE 1.826506 4 0.7676
LOG_CPI 3.024519 4 0.5537
All 3.97524 8 0.8594
Dependent variable: LOG_INTEREST_RATE
Excluded Chi-sq df Prob.
LOG_SA_REIT_INDEX 6.492967 4 0.1652
LOG_CPI 3.301347 4 0.5087
All 14.77015 8 0.0638
Dependent variable: LOG_CPI
Excluded Chi-sq df Prob.
LOG_SA_REIT_INDEX 7.572502 4 0.1086
LOG_INTEREST_RATE 13.32578 4 0.0098
All 22.86155 8 0.0035