Nigeria’s real estate investment market slows on ambiguous taxes, mispricing

The Nigerian real estate investment trust market is bogged down by a lack of assurance on ambiguous ‘tax pass through’ laws, that have not provided comfort to institutional investors, both local and foreign, as well as a traditionally opaque market, which has resulted in mispricing and undermining confidence in real estate assets.

These were the views of real estate analysts at a recent West African Property Investment Summit in Lagos, who noted that the Nigeria’s real estate investment trust market (REIT) is one of the most underinvested and marginalised markets of the Nigerian stock market.

“Despite its existence for more than ten years, the Nigerian REITs market is underdeveloped with only three established and with a combined market capitalisation of $151 million, or 0.36% of the local stock market,” they noted.

They stated that the low investment in the market is a result of a lack of assurance on ambiguous ‘tax pass through’ laws, that have not provided comfort to institutional investors, both local and foreign, resulting in deficit of A-grade real estate compared to similar urbanising environments combined with an inherently volatile and non-diversified economy overly reliant on crude oil.

“These factors have created cycles of boom and bust which have negatively impacted the real estate sector and crucially investor confidence,” adding that the REITs market has failed to develop to its potential, which they hope new reforms would address.

The analysts, Adeniyi Adeleye, head of real estate finance for West Africa at StanbicIBTC Capital and Thomas Mundy global commercial real estate provider, in a collaborative white paper on the market, were bullish on a rebound in the market in 2018 provided that regulatory improvements take place coupled with the sustainable creation of assets to reduce the supply gap in Nigeria.

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Adeleye and Mundy are optimistic that these changes will lead to a vibrant REITs market, which will transform the real estate sector and the larger economy.

They predict that an evolving and reformed REITs market will strengthen and deepen capital markets and that it would also assist in providing greater transparency and data to a traditionally opaque market, which has resulted in mispricing and undermining confidence in real estate assets.

Additional benefits stated include greater diversification of portfolios to help break concentration risk and result in increased exposure for Nigeria’s pension funds to the property market.

Currently, the pension fund exposure is 0.36 percent compared to South Africa’s pension fund exposure to REITs, which stands at 2.6 percent.