Investors in real estate and general
infrastructure have been advised to leverage Real Estate
Investment Trusts (REITs) as a viable alternative to traditional sources
of project financing.
This is recognising that a major
constraint to the growth of the real estate sector in Nigeria is
funding which, analysts say, suffers from short-term deposit supply and
long-term lending demand mismatch.
The complexity and capital intensive
nature of real estate developments and transactions, the analysts add,
demands proper and adequate funding, different from what obtains
today, where investors and developers fund their projects from either
own savings or loan facilities from lending institutions.
Traditional sources of financing for
real estate in the country at the moment include equity and debt,
real estate developers, private equity companies, insurance companies,
governments, individuals, pension funds, primary mortgage institutions
(PMIs), and commercial banks.
However, “in addition to these
traditional sources, REITs have significantly financed real estate
developments in other countries,” said Olumayowa Ogunwemimo, managing
director, FSDH Asset Management Limited, at a forum in Lagos, recently.
Ogunwemimo, who was guest speaker at a
forum on real estate financing, said an alternative source of
financing for real estate projects such as REITs had become necessary in
view of the capital intensive nature of real estate and the high cost
of traditional sources of funding, especially bank loans.
“In financing real estate, key
considerations are made to hedge against risks,” said Tola Akinbanmi of
the Real Estate Finance, Stanbic IBTC Capital, who also spoke at the
forum.
Akinbami said banks usually consider
critical issues such as availability of off-takers, location,
and titles, before loans were given.
Other considerations, which are taken
before financing real estate, he said, included development risks, land
size which must not be less than 10,000 square metres for a
retail development, experience of both the contractor and the sponsor of
the project, management of the project, and asset quality.
The story is different with REITs, which
are a form of collective investment scheme regulated by the Securities
and Exchange Commission, and pools capital from investors and uses same
in the acquisition of income generating real estate, mortgage loans, or
a combination of both.
As an investment instrument, REITs have
many benefits including portfolio diversification which, Ogunwemimo
said, offered alternatives to equities and fixed income
securities, especially for investors interested in diversification.
She said further that REITs were
relatively liquid assets (when compared with direct investment in
real estate) that could be sold fairly quickly to raise cash or to take
advantage of other investment opportunities.
Speaking earlier on the theme of the
forum – ‘Real Estate Financing in Nigeria: Modalities, Opportunities and
Challenges,’ Obi Nwogugu, fund manager at African Capital
Alliance (ACA), highlighted the opportunities in the real estate sector
in spite of the many challenges.
“There are opportunities in virtually
all the asset classes including office building, retail,
hospitality, industrial and residential real estate,” he said,
saying “the market is growing, investors are excited about it and want
to invest more.”
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