Crowdfunding the delivery of 17M mass housing units in Nigeria

Crowdfunding the delivery of 17M mass housing units in Nigeria

Property investment returns have historically outpaced the stock market and offer a variety of indirect benefits including portfolio diversification, providing a hedge against inflation and the stability of investing in a tangible asset. As a matter of fact, few investments have made as many wealthy as real estate. In his bestselling book; ‘Rich Dad, Poor Dad’, Robert Kiyosaki provided valuable insight into the wealth building strategies of corporations pointing to the acquisition of properties in choice locations by fast food companies and banks as a key underlying investment and stores of wealth.

However, due to the considerable amount of capital required to develop property; beginning from land acquisition and perfection of title, through to building and finishing the development, investment in property has typically been the preserve of the mid to upper social class of society, who having met their immediate need of acquiringpersonal homes, still retain the wherewithal to invest in the development of other properties for the sake of creating streams of passive income.

So what are the property investment options open to the so-called ‘common man’ who is unable to meet his/her immediate need of owning a property, much less invest in another for the purposes of crating passive income? Enter REITs (Real Estate Investment Trusts).

A REIT is a company that owns, and operates income producing real estate,whose shares are publicly traded in a way similar to any other stock. A REIT does however have two unique features: (i) its primary business is managing groups of income-producing properties and (ii) it must distribute most of its profits as dividends.

On Sept. 14, 1960 President Dwight D. Eisenhower of the USA signed legislation that created a new approach to income-producing real estate investment – a manner in which the best attributes of real estate and stock-based investment are combined.REITs, for the first time, brought the benefits of commercial real estate investment to all investors – benefits that previously had been available only through large financial intermediaries and to wealthy individuals.

Over time, investors responded to this new opportunity, and more than five decades after their creation the U.S. stock exchange REITs industry has grown to a $1 trillion equity market capitalization (Nigeria $224M as at 2014 according to the NSE) and nearly $2 trillion in real estate assets.REITs in the U.S. and increasingly around the world now regularly provide investors with the opportunity for meaningful dividends, portfolio diversification, valuable liquidity, enviable transparency and competitive performance.

REIT was established in Nigeria following the enactment of the Investment and Securities Act (ISA) of 2007.In 2010, the Nigerian Stock Exchange issued a position paper on the implementation of REITS in Nigeria, as a result of the recognized need to develop outlets for Pension Fund assets, and further deepen the Nigerian Capital Markets as well as create the opportunity for those who hitherto had been unable to invest in real estate, to do so with a view to increasing the supply of residential and commercial properties to the market.

However, in a 2015 comparative (academic) study, Olarenle and others found when they compared REIT dividend payouts in Nigeria to global rates, that Nigeria REIT (N-REIT) underperforms, usingMalaysia REIT (M-REIT) asa benchmark both in terms of average return 4.8% and risk adjusted return -6.77% per annum against the Malaysia REIT 7.5% and 2.47% respectively. They recommended increased capitalization, market transparency and external management as options for N-REITs performance enhancement, all of which can perhaps be correlated to the maturity of the Nigerian REIT market.

Be that as it may, the world is not waiting. As a matter of fact, alternative financing models such as ‘crowdfunding’ have emerged to further democratize real estate investment, providing even greater access for the so called ‘common man’ or unsophisticated investor to participate. Crowdfunding is the practice of raising money for investment purposes through contributions from many individuals rather than just a few.

By virtue of Title III of the US JOBS Act which was passed into law by Ex-President Obama in 2012, certain transactions (usually not exceeding $1M within a 12-month period) are made exempt from the registration requirements of the SEC. The provisions also allow for greater participation of non-accredited investors to take equity positions in companies raising funds through crowdfunding platforms which are typically hosted online.

Besides lower entry barriers, one key advantage real estate crowdfunding platforms have over REITs is with respect to the issue of ‘transparency’ which was identified as one of the major shortcomings of the N-REIT in terms of its performance. Crowdfunding platforms allow investors to individually select properties to invest in, giving them the opportunity to research properties and location thoroughly in order to determine if they are getting a fair representation of value. It also gives greater control to potential investors as it allows them select the specific property they wish to invest in.

Giving the massive shortage of housing units (currently estimated at 17 million by the FG) in Nigeria, and the inability of many small developers to raise the capital needed to deliver mass housing units -whilst countless others are itching for the opportunity to join the elite class of real estate investors, alternative financing models such as crowdfunding may just be the way to go.

It would be a win on all fronts – job and wealth creation, the delivery of the much-needed mass housing units which will enable many to achieve the dream of owning their own homes, as well as contribute to the reduction of the prevailing high costs of rent in certain cities.

*The views expressed in this article are entirely those of the author and do not necessarily reflect those of the NESG.

 

Shaninomi Eribo

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