Real estate, REITs pull pension funds attention as N1trn signals opportunity
July 16, 2024267 views0 comments
Business a.m.
Nigerian pension funds have been steadily increasing their investments in real estate and Real Estate Investment Trusts (REITs) over the years, drawn by the sector’s proven ability to provide stable returns and diversification benefits for their portfolios. This trend reached new heights in 2023, as the real estate and REITs sectors collectively attracted N1 trillion of pension investments, representing a significant uptick from previous years.
REITs are companies that facilitate the ownership, management, and financing of income-generating real estate properties. They follow a model similar to mutual funds by pooling capital from multiple investors, thereby allowing those investors to earn dividends from the income generated by the real estate assets held by the REITs.
Driven by their ability to offer dividend income from real estate assets, REITs have been a key driver in attracting a significant portion of Nigerian pension fund investments to the real estate sector as evidenced by data from the National Pension Commission (PenCom) and Pension Fund Operators Association of Nigeria (PenOp).
In 2023, N1 trillion, or approximately 5.5 percent of the total Assets Under Management (AuM) of N18.36 trillion, was channelled into real estate and REITs. The amount invested in real estate and REITs increased significantly in 2023 compared to N943.61 billion out of an AuM of N14.99 trillion in 2022, indicating a growth in confidence in the real estate sector as a vehicle for long-term investment.
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Commenting on the development, Oguche Agudah, the chief executive officer, PenOp, stated that the recent increase in pension fund allocations to real estate is a strong indication of the sector’s viability as a strategic investment choice for pension funds. Agudah noted that pension funds are constantly seeking stable, long-term investment opportunities that provide both income and capital appreciation. The growth in real estate investment allocations, he explained, suggests that the sector is meeting these criteria and attracting significant interest from pension funds as they seek to diversify their portfolios and secure their members’ financial futures.
“Pension funds have consistently been investing in real estate and REITs over the past few years, and these investments provide a stable return and help diversify the pension fund portfolios,” he stated.
Highlighting the renewed confidence of Nigerian pension funds in real estate investments, the PenOp CEO pointed out that the 2023 allocation to real estate and REITs had broken the declining trend observed over the past few years.
Agudah’s review of the previous years’ data revealed a downward trend in allocations to real estate and REITs between 2019 and 2022, with the peak recorded in 2019 at N972.83 billion out of a total AuM of N9.58 trillion.
Between 2020 and 2022, the Nigerian pension sector’s allocation to real estate and REITs steadily declined despite the overall growth in the sector’s Assets under Management (AuM). In 2020, N958.35 billion of the N12.31 trillion AuM was invested in real estate and REITs. In 2021, the figure dropped slightly to N957.27 billion of the year’s N13.42 trillion AuM, declining further to N943.61 billion out of the N14.99 trillion AuM recorded in 2022.
However, the increase in allocations to N1 trillion out of N18.36 trillion in 2023 reversed the downward trend and signalled a renewed confidence in real estate investments, as pensions recognised the potential for growth and stability within the sector.
Agudah noted that the N1 trillion allocation to real estate and REITs in 2023 marked a significant increase compared to the previous years, indicating a positive shift in the attitude of Nigerian pension funds towards the sector.
Dave Uduanu, managing director and chief executive officer of Access Pensions Limited, also recognised the increased attraction of real estate investments for pension funds. He also acknowledged that these investments provide competitive returns and help reduce Nigeria’s infrastructure deficit.
According to Uduanu, pension managers are indeed interested in adding real estate to their investment portfolios due to the stability and potential returns the sector can offer.
However, he stressed that such investments must be well-structured and carefully considered to ensure that they align with the pension funds’ objectives and risk tolerance.
“I am optimistic that the space is an emerging space with enormous prospects for PFAs and institutional investors,” he said.
Recent regulatory developments have also played an important role in facilitating greater investments in real estate by Nigerian pension funds. Notably, the introduction of regulatory measures for equity contributions for residential mortgages in December 2023 has helped to promote more significant investments in the residential real estate market by reducing the equity required from borrowers and thereby increasing demand for residential mortgages.
It appears that the December 2023 regulatory changes are already showing positive results in the first quarter of 2024, with a significant number of RSA pension contributions opting to utilise equity contributions for their residential mortgages.
According to PenCom’s first quarter 2024 data, there has been an uptake of the equity contribution option for residential mortgages, with 2,971 RSA pension contributions opting for this financing arrangement and N29.2 billion already allocated for this purpose.
In the first quarter of 2024, a total of 1,390 RSA holders requested access to 25 percent of their balances to fund equity contributions for residential mortgages. PenCom stated that it approved 1,234 of these requests, amounting to a total of N10,519.73 million. Of the approved requests, 379 came from private sector employees and 855 from public sector employees.
While the real estate sector has witnessed substantial investments from Nigerian pension funds, a chief investment officer at a PFA, who preferred to remain anonymous, said there remains untapped potential for greater investments in infrastructure, particularly real estate.
“One thing we can do better is to have a visible impact. One way people can truly feel the tangible impact of their pensions is in the area of infrastructure investments, and real estate is key here,” the officer stated.
The rising investments in real estate by Nigerian pension funds are indicative of the promising prospects for growth and stability that this sector offers, as well as the strategic insight of pension fund managers.
By allocating substantial portions of their portfolios to real estate, fund managers are demonstrating their ability to identify attractive investment opportunities and diversify their holdings in a way that can provide long-term returns and capital preservation.
According to industry analysts, this shift in focus towards real estate reflects a wider industry trend of seeking more stable, resilient investments that can provide a solid foundation for the future growth of pension funds.