Real estate is a diverse industry with numerous investment options. While most real estate investors focus on buying physical property, a few choose an alternative that allows the investor to invest in a property without buying it outright.
Real estate is a diverse industry with numerous investment options. While most real estate investors focus on buying physical property, a few choose an alternative that allows the investor to invest in a property without buying it outright.
This is accomplished through the use of Real Estate Investment Trusts (REITs).
This article looks at some of the benefits and drawbacks of investing in a REIT.
What do real estate investment trusts mean?
Real Estate Investment Trusts (REITs) are corporations (trusts) that pool capital from many investors to purchase and manage income-producing properties or mortgage loans.
REIT investors can benefit from the capital appreciation and rental income generated by the fund’s real estate assets. Dividends are paid to investors out of the fund’s profits. Also, they can sell their shares at a profit if the market value increases.
As a result, REIT holders benefit from the ability to own real estate assets without committing the large sums of money typically required to invest directly in real estate. This also provides the benefit of not having to manage a property or mortgage directly.
When you invest in physical real estate, you are primarily looking to make money in one of two ways: either through rental income or by buying, holding, and selling a property for a profit—that is, flipping it.
Nigerian Real Estate Investment Trusts
REITs, like other stocks, are traded on the Nigerian Stock Exchange (NSE). REITs, like stocks and shares, can be bought and sold through licensed stockbrokers. The top REITs in Nigeria are Union Homes, Skye Shelter Fund and UPDC Real Estate Investment Trust.
The African REIT market is worth approximately $29 billion, with operations in four countries: Ghana, Kenya, Nigeria and South Africa.
REITs in Nigeria are among the oldest on the African continent, having been introduced to the market over 12 years ago. Despite this, they have yet to fully establish themselves in the country. According to an EY report, the global market capitalization of REITs is $1.7 trillion.
Nigeria’s global market share is very small, with just three REITs listed on the NSE, compared to South Africa’s more than 30 on the JSE. The total market capitalization of publicly traded Nigerian REITs is around Naira 50 billion, which is about 0.4% of the NSE.
The REIT sector faces many challenges, including a lack of industry knowledge and restrictive legislation, such as the Land Use Act of 1978.
Things to Consider Before Investing in REITs or Real Estate Capital Required
The purchase of real estate requires a substantial investment. Investors require both startup and ongoing capital.
A deposit, legal fees, registration fees, and appraisal fees are examples of start-up capital.
Continuing capital consists of a steady source of income (if you get a mortgage), property taxes, and maintenance fees. youThe costs of investing in multiple physical real estate assets can add up quickly.
REITs require a much smaller initial investment. These shares can be bought to test the waters while still having room to invest more money. Small REIT investments may not be profitable due to broker fees. As a result, you need to invest a significant amount to see a reasonable return on investment.
Leverage
With physical property, you may be able to obtain financing to purchase real estate. You can get a private mortgage or apply to the National Housing Fund (NHF).
These loans can be leveraged to make more money than REITs. REITs generally do not have access to financing, and when they do, the amounts available are small.
For example, suppose you put down 10 million naira (20% of the purchase price) on a house worth 50 million. If the value of the house increases by 5% to 52.5 million naira, you will have earned 2.5 million naira. The same 5% capital gain that you would have received if you had invested the $10 million in a REIT would have resulted in a gain of just 500,000 naira. In this case, investing in physical property earned him five times the return on a REIT.
Diversification
Due to the high initial capital requirements, you are unlikely to buy multiple properties at once when you own real estate outright. As a result, a considerable portion of your assets may be invested in one or two properties.
Investing in a REIT, on the other hand, allows you to indirectly invest in a wide range of properties in both commercial and residential classes. Certain types of properties, such as shopping malls and hotels, that may have been inaccessible to individual investors due to capital restrictions, can now be more easily accessed through a REIT.
Convenience
Investing in REITs is simple; just look at the publicly available data and decide where to put your money (or hire an investment adviser to do the work for you). You can then proceed to purchase REITs through a brokerage firm.
Buying and holding physical property is a much more complicated process that includes things like finding a real estate agent, viewing properties, negotiating prices, arranging financing, etc.
Liquidity
Finding a buyer willing to buy at the price you want to sell your investment property can take time, especially in a bad market.
The prices at which you buy and sell your REIT shares are determined solely by the market (which can be good or bad). When you sell your shares, you will receive the equivalent amount of money fairly quickly.
Farm administration
Owning physical real estate requires you to manage it yourself, unless you hire a property manager. Dealing with tenants and maintaining the property can be time consuming.
When you invest in a REIT, you are entrusting these aspects of property ownership to a professional outside management team.
Control
In the case of REITs, you are giving up control in exchange for leaving asset management in the hands of professionals. All decisions are made on your behalf by the property managers/majority shareholders. You have no control over decisions like when to sell, rent, or improve a property. Direct ownership of the property allows you to make your own decisions when you need to.
Nigeria REIT Market
Although growing, the Nigerian REIT market is still underdeveloped. As a result, returns in more mature markets such as the US or the UK may not materialize in Nigeria. The opposite is true when it comes to directly owning real estate. Yields in Nigeria are usually much higher than those in more western countries.
Which is preferable?
Direct real estate investing and REIT investing have advantages and disadvantages. Investors must weigh their options and decide which is best for them. A combination of REITs and directly owned real estate may be an acceptable compromise.
Investing in physical property can be superior in terms of creating real wealth. REITs may be a better option for you in terms of capital preservation and a less stressful way to generate income. The most important thing to do before investing money is to make sure you are well informed and understand the risks.
