Introduction
Introduction The world over, investing in real estate is ordinarily done using direct methods such as purchasing, building, licensing and leasing out properties and earning returns therefrom. The advent of real estate investment trusts ("REIT") in the United States of America in 19601 gave a new dimension to investing in real estate. REIT became popular real estate investment vehicle and an alternative to direct real estate investment. Investment in REIT eases the burden of directly seeking, evaluating, running and managing the properties by the investors and gives them an opportunity to invest and earn dividend from a real estate asset. REIT are vehicles for investment by which investors place money with a trustee who selects, invests and operates real estate physical assets and/or securities for gain and/or income
In Nigeria, Real Estate Investment Schemes ("REIS")2 were introduced in 2007.3 This is about five (5) decades after the introduction of REITs in the United States of America. REIS had started in Nigeria with the establishment of Skye Shelter Fund in 2007 with a capitalization of ₦ 2billion ($6,535,948). This was followed by Union Home Hybrid REITs in 2008 and UACN Property Development Company REITs (UPDC) in 2013 with capitalizations of N50billion ($163,398,623) and N30billion ($98,039,216) respectively.4 Notably, the above are still the major REIS vehicles in Nigeria.5 The number of REIS vehicles in Nigeria has not significantly increased, perhaps because the existing REIS vehicles have recorded low, and at some point, negative, return values on their respective investments.6
In this article, the authors will analyse the legal regime for REIS in Nigeria and the rate of performance of REIS as a vehicle of investment in the Nigerian capital market. We are of the view that, although, the regulatory regime of REITS in Nigeria appears to be well-structured, REITS have continued to perform poorly in Nigeria in large part because the law does not support them as it should. This poor performance is due to several factors ranging from the unfriendly provisions of the Land Use Act and Tenancy Laws, strict conditions for the investment of pension assets in real estate, lack of attractive incentives (e.g., tax efficient options for pooling large investment monies by expert managers) and so forth.
The Nature of Reis
Unlike direct investments in real estate, REIS denotes an investment vehicle (a trust, company, or any other approved corporate structure) through which investors pool capital with which the vehicle acquiresreal estate assets, manages and holdsthe same for the benefit of the investors. REIS in Nigeria may take either of two the forms: (a) real estate investment company ("REICO") or (b) real estate investment trust ("REIT"), duly established for the sole purpose of acquiring intermediate or long-term interests in real estate or property development and may raise funds from the capital market through issuance of securities. A REIT typically issues unit certificates to investors. These confer such investors with rights to a share of income from real estate while a REICO issues its shares to the investors which confer voting and distribution rights in the REICO to the investors.7 REIS are established for the sole purpose of acquiring intermediate or long-term interests in real estate or property development.8 Their constitutional documents typically say clearly that by law they cannot engage in any activity not connected with such a purpose thereof.
The Securities and Exchange Commission Rules and Regulations 2013 (as amended) ("SEC Rules") defines REIS as a company, a trust or other such corporate structures as may be approved and regulated by Securities and Exchange Commission ("SEC"), which primarily engages in, and invests in income generating real estate assets or real estate related assets.9 A distinctive feature of REIS vehicles is that its securities may be traded on recognized stock exchanges which can be bought or sold through authorized brokers as stocks or shares.
The Constitution of Reis
As discussed, REIS may take the form of either a REICO or a REIT.10 The following documents are required for a REICO to be established and registered by SEC;11 (i) certified copies of the certificate of incorporation issued by the Corporate Affairs Commission ("CAC"); (ii) certified copies of memorandum and articles of association with at least one object authorizing the company to invest in real estate and real estate related business; (iii) certified copies of CAC form stating the particulars of directors12; (iv) copies of the draft prospectus and abridged prospectus; (v) evidence of increase in share capital where applicable; (vi) evidence of appointment of property manager duly registered with SEC; and (vii) a valuation report made by a real estate valuer registered with SEC in respect of any real estate property acquired.
In the case of a REIT, established as a trust, an application for registration as a real estate investment trust is made to SEC with a prospectus and trust deed in a prescribed form.13 Notably, an initial public offer for a REICO or REIT must not be for less than N1billion while subsequent offers must not be less than N500million.14
Interestingly, since the selection, investment, and monetization of real estate assets are the basis for REIS, SEC mandates the insurance of such real estate assets by a REICO within ninety (90) days of the commencement of the scheme and within thirty (30) days of any subsequent acquisition. Unlike REICO, a REIT is required to insure the assets but is not mandated to file evidence of such insurance with SEC.15
Furthermore, REIS is required to (a) derive a minimum of 90% of its revenue (excluding capital gains) from both rental and dividend incomes (b) make annual distribution of not less than seventy-five per cent (75%) of its rental income or dividend income to its unit holders and/or shareholders; and (c) distribute seventy-five per cent (75%) of its rental income and dividend at least once a year. Where a REIS fails to comply with these requirements, it is liable to a revocation of its operating licence by the SEC.16
Footnotes
1 Olusegun Olanrele, Rosli Said et al. 'Real Estate Investment Trusts (REITS) Industry in Nigeria: The Influence of External Factors on Returns' (2014) Conference Paper (https://www.researchgate.net/publication/336136203) accessed on May 12, 2023.
2 Similar to REIT with little nuances explained in this article.
3 Dabara D.I 'Evolution of REITs in the Nigerian Real Estate Market' (2022) JPIF 40 (https://doi.org/10.1108/JPIF-09-2020- 0098) accessed on May 12, 2023.
4 Daniel Ibrahim, Olusegun Adebayo 'The Structure, Conduct and Performance of REITs in Emerging Markets: Empirical Evidence from Nigeria' (2019) JARER 4 (https://journals.uct.ac.za/index.php/JARER/article/download/827/656) accessed May 12, 2023.
5 Abubakar Bokani, Abubakar Madaki 'An Appraisal of the Legal Regime for Regulation of Real Estate Investment Trusts in Nigeria' (2022) NAU.JCPL 9 (4) https://journals.unizik.edu.ng/index.php/jcpl/article/view/2006 accessed May 11, 2023.
6 Supra note 4.
7 Investment and Securities Act 2007 s.193 (1)
8 Ibid.
9 New Rules and Amendment to the Rules and Regulations of the Commission as at June 2017, Rule 508
10 Investment and Securities Act 2007 s.193
11 Securities and Exchange Commission Rules and Regulations [2013] Rule 511.
12 CAC Status Report (where applicable).
13 Ibid. Rule 526.
14 Supra note 13, Rules 515 and 530
15 New Rules and Amendments to the Rules and Regulations of the Commission as at June 2017, Rule 510 (2) (3) (a) and (b).
16 Ibid.
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