This article is written by OKOOBO ESELE DOREEN of UNIVERSITY OF BENIN in 400 LEVEL during her internship with Ledroit India
Abstract.
Real Estate Investment Trusts (REITs) are collective investment vehicles that enable investors to participate in income-generating real estate without direct ownership. Combining features of corporate organization and investment schemes. Thus, this article is aimed at examining the corporate structure of real estate investment trusts, highlighting their legal form and the roles of key participants such as sponsors, trustees, managers, and investors. It also analyzes the regulatory framework governing REITs.
Introduction
The Nigerian real estate sector continues to attract investors seeking stable returns and portfolio diversification. Yet, traditional property investment requires substantial capital and involves complex management responsibilities. This is where Real Estate Investment Trusts (REITs) come in. It offers a regulated and efficient way to invest in real estate without directly owning or managing property.
MEANING OF REITS
Real Estate Investment Trusts (REITs) is a collective investment vehicle that pools funds from multiple investors to acquire, manage, or finance income-generating real estate assets. These assets often include residential buildings, office complexes, shopping malls, hotels, or industrial properties. Investors in REITs earn returns through rental income, capital appreciation, or both. The benefit of REITs is that they can avoid corporate income taxes (mostly) while offering the ability to diversify a portfolio’s investment mix. In the real estate sector, REITs are commonly identified by the type of real estate they hold.
Most REITs are traded on major stock exchanges, but there are also public non-listed and private REITs.
Corporate structure of REITS
Real Estate Investment Trusts (REITs) are structured to enable collective investment in real estate while ensuring proper management and investor protection. REITs may be established as companies or unit trust schemes, depending on the jurisdiction. In Nigeria, REITs are commonly structured as unit trusts and regulated by the Securities and Exchange Commission (SEC).
The structure of a REIT is characterized by a separation between ownership and management. Investors, known as unit holders, provide capital but do not engage in the day-to-day management of the trust. Management functions are carried out by a professional REIT or fund manager, who is responsible for acquiring and managing properties, collecting income, and distributing returns to investors.
A trustee is appointed to hold the assets of the REIT on behalf of the unit holders and to ensure that the manager complies with the trust deed and regulatory requirements. This separation of roles enhances transparency and reduces conflicts of interest. REITs raise capital through the issuance of units, which are often listed on a stock exchange to improve liquidity. Overall, the corporate structure of REITs combines corporate governance principles with trust arrangements to promote accountability and investor confidence.
Types of REITS
There are three main types of REITs , they are
Equity REITs, Mortgage REITs commonly known as mREITs and Hybrid REITs Equity REITs generate income through the collection of rent on, and from sales of, the properties they own for the long-term. Mortgage REITs invest in mortgages or mortgage securities tied to commercial and/or residential properties. To explain further, Equity REITs are real estate companies that own or manage income producing properties such as office buildings, shopping centers and apartment buildings – and lease the space to tenants. After paying the expenses associated with operating their properties, equity REITs pay out annually the bulk of the income to their shareholders as dividends. Whereas, Mortgage REITs (mREITs) provide financing for income-producing real estate by purchasing or originating mortgages and mortgage-backed securities and earning income from the interest on these investments, while hybrid REITS combine features of both, holding a mix of property investments and real estate financing instruments.
Legal and regulatory frameworks
Real Estate Investment Trusts (REITs) do not operate in a legal vacuum. Their activities are regulated by statutory and regulatory frameworks designed to protect investors, ensure proper management, and promote transparency in the real estate investment sector.
The Nigerian REITs market is primarily regulated by the Securities and Exchange Commission (SEC) under the Investment and Securities Act, 2007 (ISA) and the SEC Rules and Regulations, 2013 (as amended). These frameworks outline registration, governance, disclosure, and distribution requirements for REITs in Nigeria.
The Investment and Securities Act, 2007 (ISA):
•The ISA grants the SEC authority to regulate collective investment schemes, including REITs, ensuring transparency, investor protection, and market stability. It sets out procedures for registration, disclosure obligations and investor protection mechanisms. Specifically, section 153 to 160 of the ISA provides for the regulation of collective investment schemes, defining them as arrangements in which investors pool funds for investment in assets and share the proceeds in proportion to their contributions. This ensures that REITs operate under the same regulatory discipline as mutual funds and other capital market instruments.
SEC Rules on Collective Investment
Schemes:
Part XVIII of the SEC Rules (Rules 549–577) provides the specific framework for REITs. It sets out detailed provisions on how REITs should be structured, governed, and operated in Nigeria. The rules cover aspects such as:
Registration Requirements
Minimum subscription Threshold
Disclosure and reporting
Distribution obligation
Investment limitations.
The Nigerian Exchange Limited (NGX):
The NGX plays a key role in listing and trading REITs units, ensuring liquidity and regulatory oversight through continuous disclosure obligations for listed funds. The NGX listing rules impose ongoing obligations on REITs, including timely disclosure of material information, submission of periodic financial statements and adherence to corporate governance standards.
Trustee Structure:
Every REIT must be constituted by a Trust Deed between the promoter (often a fund manager) and a licensed trustee. The trustee holds the underlying real estate assets on behalf of the investors and ensures compliance with both the Trust Deed and SEC regulations. This structure promotes accountability and reduces the risk of mismanagement.
Overall, the legal and regulatory framework governing REITs provides the foundation for their effective operation by setting clear standards for registration, management, disclosure, and investor protection. Proper enforcement of these rules is essential to ensuring transparency, market confidence, and the sustainable growth of REITs.
Benefits of Investing in REITs:
Investing in Real Estate Investment Trusts (REITs) offers several benefits to investors, particularly in terms of accessibility, income generation, and risk diversification.
•Diversification: REITs offer a way to diversify your investment portfolio by including real estate alongside stocks and bonds. By investing in a portfolio of properties across different sectors, thereby reducing the impact of losses from a single property.
•Liquidity: Unlike directly owning property, REITs are traded on stock exchanges, allowing you to buy and sell shares easily. As their units are often listed on a stock exchange and can be easily bought or sold compared to physical real estate.
•High Returns: REITs typically offer attractive dividend yields, often exceeding 10%. Real Estate Investment Trusts (REITs) have the potential to generate high returns for investors due to their investment in income-producing real estate and mandatory income distribution requirements. REITs earn returns from rental income and, in some cases, capital appreciation of property assets. Regulatory rules often require REITs to distribute a substantial portion of their earnings as dividends, ensuring that investors receive regular and competitive returns. Additionally, professional management and diversified property portfolios can enhance profitability and reduce investment risk, thereby improving overall returns
•Price Stability: Price stability is a key benefit of investing in Real Estate Investment Trusts (REITs) because their value is largely supported by income-generating real estate assets. Unlike ordinary shares whose prices may fluctuate widely due to speculation, REIT prices tend to be more stable as they are backed by tangible properties that produce regular rental income.
•Convenience: Investing in REITs is a convenient way to gain exposure to real estate. This is because it’s easy to research and buy them through a brokerage firm.Unlike traditional real estate investment, REIT investors do not need to search for properties, manage tenants, handle maintenance, or deal with legal and administrative issues. REIT units can be easily purchased and sold through the capital market, making the investment process simple and flexible
•Tax planning
A-REITs can sometimes make tax deferred contributions, when a high level of deductions for items like depreciation, capital allowances and refurbishment costs leaves them with a distributable income higher than their taxable income. That may enable investors to manage the timing of their tax liabilities, potentially deferring tax payments until their marginal tax rate is lower.
However, tax laws can be complex and everyone’s situation is different, so it’s important to get professional advice before you invest.
CHALLENGES FACED BY REITs
As the REIT landscape develops, evolving and emerging risks can significantly impact their performance and stability. Understanding the following risks is crucial for stakeholders to better navigate the complexities of the market effectively. Thus it is discussed bellow
1:Economic and financial challenges
Property assets continue to be influenced by a number of factors, including:
•Inflation of property values
•Fluctuating interest rates
•More frequent natural disasters increasing the likelihood of property damage
Shrinking capacity as insurers reduce their appetite in certain regions and for occupancies prone to loss.
Higher interest rates pose significant economic and financial challenges for REITs by increasing borrowing costs and limiting access to affordable financing. As interest rates rise, it becomes more expensive for REITs to fund property acquisitions and developments. This challenge is further intensified during refinancing, as existing debts must be renewed at higher rates. Increased debt servicing obligations reduce cash flow and may negatively affect dividend distributions to investors. In extreme cases, this can lead to liquidity constraints and diminished investor confidence. Moreover, rising interest rates create uncertainty in property valuations, as fluctuating appraisal values may reduce the net asset value of REIT portfolios and result in asset write-downs.
2. Shifting industry dynamics
The real estate industry at large is shifting, particularly in the office and retail sectors. The rise of hybrid work models has led to ongoing challenges in the office market, with above average vacancy rates and shifting tenant demands. REITs heavily invested in office properties may need to rethink their strategies, focusing on flexibility and adaptability to meet the evolving needs of today’s workforce.
In the retail sector, the impact of e-commerce and changing consumer habits continues to reshape traditional retail spaces. As consumers increasingly favor online shopping, REITs must adapt by reimagining their retail portfolios. This may involve diversifying into experiential retail or mixed-use developments that cater to changing consumer preferences. Understanding these industry dynamics is an essential component of a REIT’s overall strategy to to remain competitive and resilient in a rapidly evolving market.
3:. Geopolitical and regulatory risks
Geopolitical instability presents a significant risk for REITs, particularly those reliant on foreign investment. Global tensions can affect capital flows and lead to uncertainty in the market. Additionally, policy and regulatory changes, such as shifts in tax policies and housing regulations, can have direct implications for REIT returns. Stakeholders must stay informed about geopolitical developments and engage with policymakers to navigate these challenges more effectively.
The regulatory landscape is also evolving. REITs that fail to adapt to these changes may face reputational risks and potential financial penalties. Proactive engagement with regulatory bodies and a commitment to transparency can help REITs mitigate these risks and enhance their long-term sustainability.
4. Climate-related vulnerabilities
Properties worldwide are facing heightened vulnerability to climate-related weather events. Increased insurance costs and the potential for property damage from extreme weather events can significantly impact financial performance. REITs must assess their portfolios for climate-related risks and consider investing in resilient infrastructure and sustainable practices.
Moreover, as investors become more environmentally conscious, REITs that prioritize sustainability may find themselves at a competitive advantage. Implementing green building practices and enhancing energy efficiency may not only mitigate risks but also attract a growing base of socially responsible investors.
5. Technology and cybersecurity threat
In an increasingly digital world, technology and cybersecurity risks are paramount for REITs. Reliance on digital platforms for tenant engagement and financial transactions can expose REITs to potential cyberattacks and data breaches. A successful cyberattack of a property management system, for example, can lead to significant financial losses, reputational damage, and regulatory scrutiny.
To mitigate these risks, REITs must invest in robust cybersecurity measures and ensure that their technology infrastructure is resilient. Regular training for employees on cybersecurity best practices and the implementation of risk management strategies are essential steps in a comprehensive plan designed to safeguard against potential threats.
PROTECTING REIT INTEREST THROUGH PROACTIVE RISK MANAGEMENT
By proactively managing these risks and fostering a culture of innovation and resilience, REITs can better position themselves for sustainable growth in an ever-evolving landscape. Collaboration among industry stakeholders, along with a commitment to transparency and responsible practices, will be key to navigating the challenges ahead and seizing opportunities for success in the future.
CONCLUSION.
Conclusively, this article has examined the meaning and types of Real Estate Investment Trusts (REITs), their legal and regulatory frameworks, as well as the benefits and challenges associated with investing in them. While REITs provide investors with accessible, diversified, and income-generating opportunities in the real estate sector, they are also exposed to economic, regulatory, technological, and environmental risks. However, these risks can be effectively managed through proactive risk management strategies, sound corporate governance, and strict regulatory compliance. With adequate oversight and investor awareness, REITs can continue to serve as a viable and sustainable investment vehicle in the real estate and capital markets
