How Real Estate Investment Trusts Work in Nigeria

In Nigeria, Real Estate Investment Trusts (REITs) provide a way for everyday Nigerians to invest in real estate without needing millions of naira or the hassle of managing properties. 

In simple terms, REITs are companies that own, manage, or finance income-generating real estate, and they allow you to buy shares in these real estate ventures, just like you would buy shares in a company.

Essentially, REITs allow you to invest in real estate without the need to buy, manage, or maintain property yourself.

Think of REITs as mutual funds for real estate. Instead of you directly owning a property, you own shares in a REIT, which in turn owns and manages the properties. As an investor, you earn a portion of the income generated by the properties through dividends.

Let’s break this down further and see how to key into this innovative real estate.

What is a REIT?

Real Estate Investment Trusts (REIT) is a company that pools money from various investors to buy, manage, and operate 

Think of a REIT as a company that invests in large properties like shopping malls, hotels, office buildings, or even residential complexes. 

Instead of having to buy an entire house or apartment building, you buy shares in the REIT, and through that, you own a small piece of many different properties. 

As these properties generate income (usually from rents), you get a share of that income through dividends.​

Real Estate Investment Trusts in Nigeria are listed on the Nigerian Stock Exchange (NSE). Anyone with a stock trading account can invest in them. Some notable REITs in Nigeria include Union Homes REIT, UPDC REIT, and Skye Shelter Fund​.

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How Do REITs Work in Nigeria?

Here’s how it works step-by-step:

1. Pooling of Funds: A REIT collects money from many investors. It uses this money to buy and manage real estate properties that generate income, like apartments, offices, or hotels.
2. Income Generation: These properties generate money primarily through rent paid by tenants or, in the case of certain REITs, through interest earned from real estate loans. This money is pooled and distributed to investors as dividends.
3. Dividends: In Nigeria, REITs are legally required to pay out at least 90% of their taxable income to shareholders in the form of dividends. This makes REITs an attractive option for people looking for a steady stream of income​.
4. Liquidity: Unlike directly owning a property, where selling could take a long time, you can easily buy or sell shares in a REIT through the stock exchange. This gives you more flexibility.
5. Professional Management: REITs are managed by professionals who handle all the tough work—property maintenance, tenant issues, legal matters, etc. So, as an investor, you don’t have to worry about the day-to-day management of properties​.

Types of REITs in Nigeria

There are different types of REITs, and each one focuses on various aspects of real estate. Here are the most common types:

• Equity REITs: These own and manage physical properties. They make money by renting out properties and selling them for a profit. If you’ve ever stayed in a hotel, shopped in a mall, or rented an apartment, you’ve probably contributed to the income of an Equity REIT.
• Mortgage REITs: These don’t own properties but rather finance real estate by giving out loans to property owners or buying mortgage-backed securities. They earn through the interest on these loans.
• Hybrid REITs: As the name suggests, these combine both equity and mortgage investments​.

Why Should You Consider Investing in REITs?

Here are some reasons why you should look towards the REITs way:

1. Low Barrier to Entry: One of the best things about REITs is that you don’t need to be a millionaire to invest. Instead of shelling out millions to buy a property outright, you can start small by purchasing shares in a REIT.
2. Diversification: REITs allow you to own a piece of multiple properties, reducing your risk. For example, if one property in the REIT isn’t performing well, the others might be doing better, balancing things out​.
3. Regular Income: Thanks to the 90% dividend payout rule, REITs provide a steady stream of income. This makes them attractive to investors looking for regular cash flow without the hassles of being a landlord.
4. Liquidity: If you own a house and need cash, it might take months to sell the property. But with REITs, you can buy or sell shares quickly on the stock exchange, giving you much-needed flexibility​.
5. Professional Management: Owning property comes with responsibilities like maintenance, dealing with tenants, and handling legal issues. REITs remove this burden because they are managed by professionals​.

Challenges of REITs in Nigeria

While Real Estate Investment Trusts in Nigeria are a great investment tool, there are some challenges to be aware of:

1. Lack of Awareness: In Nigeria, many people are not familiar with REITs as an investment option. Despite being around since 2007, REITs still haven’t gained the same popularity as in other parts of the world​.
2. Market Volatility: REITs, like stocks, can experience fluctuations in value. This means that while you may earn dividends, the value of your shares can go up or down based on market conditions​.
3. Regulatory Issues: Nigeria’s real estate market has its own set of regulatory hurdles. For instance, the Land Use Act and other restrictive legislation can make it difficult for REITs to acquire land or property efficiently.

How to Invest in Real Estate Investment Trusts (REITs) in Nigeria

Passive income in real estate is exciting and fortunately, investing in Nigerian REITs is simple:

1. Open a Stock Trading Account: You’ll need to open an account with a licensed stockbroker in Nigeria. This will give you access to the NSE, where REIT shares are traded.
2. Research the REITs: Not all REITs are the same. Look at the types of properties they hold, their management team, and past performance to make an informed decision.
3. Buy Shares: Once you’ve selected a REIT, buy shares through your stockbroker. You can start small and add more as you grow comfortable.
4. Earn Dividends: As the REIT collects rental income and other profits, you’ll receive your share of the dividends. These can be reinvested or withdrawn as per your preference.

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Is REIT a Good Option for You?

REITs offer a flexible, accessible way to invest in real estate without needing huge sums of money or dealing with the stress of property management. 

In summary, REITs in Nigeria are still developing, but they offer a unique opportunity for individuals to invest in real estate with less money and effort compared to buying property directly. 

As awareness grows and the market matures, REITs could become a major player in Nigeria’s investment landscape.

However, like any investment, it’s essential to understand the risks involved. If you’re looking for a way to benefit from Nigeria’s growing real estate market without the traditional barriers, REITs might be the perfect option for you.

Now is the time to take advantage of this evolving opportunity.

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