REITs, investment portfolio and bridging Africa’s housing deficit

BY OLUFEMI ADEDAMOLA OYEDELE

REITs, otherwise known as real estate investment trusts, are companies that own or finance income-producing real estate across a range of property sectors. These real estate companies have to meet a number of requirements, including structure and operations to qualify as REITs. Most REITs trade on major stock exchanges, and they offer a number of benefits to investors. REIT-owned real estate, located in every state, is an integral part of the United States’ economy and other developed economies. Through the properties they own, finance and operate, REITs are pools of real estate investments working for property investors. REITs are a good way of diversifying portfolios and spreading risks across various forms of commercial property investments.
REITs provide investors the chance to own valuable real estate, present the opportunity to access dividend-based income and capital appreciation, and help communities grow, thrive, and revitalize. REITs allow anyone to invest in portfolios of real estate assets the same way they invest in industries – through the purchase of individual company shares or stock or through a mutual fund or exchange traded fund (ETF). The stockholders of a REIT earn a share of the income produced through real estate investment – without actually having to go out and buy, manage or finance properties and the stock managers buy or develop income-yielding properties with the accumulated fund of stockholders. REIT is a good way to invest pension funds.
REIT is still unpopular in Africa with Nigeria having three listed REIT companies; Egypt, 1; Ghana, 0 and South Africa, 30. REITs offer a simplified method of investing in UK commercial and residential properties. United Kingdom REITs have been around for about fifteen years and they are more than 70 organisations. These REITs were introduced by initial take up by the large listed property companies. REITs are now more of a sector-driven investment vehicle. REITs work in the same way as mutual funds, with a number of private investors contributing their own capital to create one single pool of funds. The pool is then used to build a portfolio of properties, whose income is almost wholly distributed among its shareholders on a regular basis.
In total, there are about 1,100 REITs of all types and they collectively own more than $3 trillion in gross assets across the U.S., with stock-exchange listed REITs owning approximately $2 trillion in assets, representing more than 500,000 properties. U.S. listed REITs have an equity market capitalization of more than $1 trillion. REITs invest in a wide scope of real estate property types, including offices, shopping malls (pedestrian, strip and centres), apartment buildings, cinema centres, restaurants, warehouses, retail centres, industrial facilities, medical facilities, data centers, cell towers, infrastructure, self-storage facilities, holiday resorts and hotels. Some REITs invest in farming by buying farmland and leasing to farmers.
Most REITs focus on a particular property type, but some hold multiple types of properties in their portfolios. They also operate along a straightforward and easily understandable business model. By leasing out space and collecting rent on its real estate, the company generates income which is then paid out to shareholders in the form of dividends. REITs must pay out at least 90 percent of their taxable income to shareholders – and most pay out 100 percent. REIT is tax-efficient as shareholders do not have to pay taxes on income generated. mREITs or mortgage REITs, unlike eREITs or equity REITs, do not own real estate directly, instead they finance real estate procurement and earn income from the interest generated on these investments.
Historically, REITs have delivered competitive total returns, based on high and steady dividend income which is less volatile. Their comparatively low management risk with other investments also makes them excellent portfolio diversifiers that can help reduce overall portfolio risks and increase returns. REITs’ track record of reliable and growing dividends, combined with long-term capital appreciation through stock price increases, has provided investors with attractive total return performance for most periods over the past 45 years compared to the broader stock market, as well as bonds and other assets. The global average return on REITs (equity and mortgage) was 9.6 percent in 2020. These are the characteristics of REIT-based real estate investments.
Listed REITs are professionally managed, publicly quoted companies that manage their businesses with the goal of maximizing stockholders’ value. They position their properties to attract tenants and earn rental income and manage their property portfolios and buy and sell assets to build value throughout long-term real estate cycles. They can only invest in different types of real estate. The shareholders – minimum of 100 members being together for a minimum of 335 days in a year – choose a board of directors to manage the trust and the board of directors is responsible for choosing the investments and for hiring team members that will manage the trust on a daily basis. Five or fewer members must not have more than 50 percent shares of a REIT.
Inflation, increase in interest rates and type of real estate investments may affect the performance of REITs. An individual may buy shares in a REIT, which is listed in major stock exchanges, just like any other public stock. Investors may also purchase shares in a REIT Mutual Fund or Exchange Trust Fund (ETF). A broker, investment advisor or financial planner can help analyze an investor’s financial objectives and recommend appropriate REIT investments. Investors also have the ability to invest in public non-listed REITs and private REITs. REITs are a good way of ensuring there is a large pool of funds for real estate products. REITs lack of popularity in Africa is due majorly to lack of awareness of its operational modalities, whereas, the fund can be used to bridge the wide housing gap in Africa.

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