IFN Monthly Article on Nigeria
Nigeria’s first Islamic REIT comes to town
Signposting the expansion of the local Islamic finance industry, Nigeria’s first Shariah compliant Real Estate Investment Trust (REIT) came to the market a few weeks ago. The debut $52 million Islamic REIT offer opened to the Nigerian investing public seven years after the last conventional REIT issuance. Nigeria has a growing real estate market with high demand for properties in commercial cities, however, REITs have so far not featured prominently.
Despite the promising real estate sector, the existing REITs have largely underperformed with most delivering sub-inflation rental yields. This can be attributed to a number of factors including the concentration of high-priced residential properties in these existing schemes as well as the challenges that besieged the premium-end of the residential market following macro-economic headwinds in the last five years. In addition, there was previously a lack of clarity regarding the tax treatment of REITS which has now been resolved. Consequently, the low profitability and irregular distributions of the existing schemes have held back what should ordinarily be a booming REIT market – until now.
The debut Islamic REIT aims to change the REIT narrative in Nigeria. The Islamic REIT intends to acquire earning office and retail assets in a market that has undergone a significant price correction due to the COVID-19 pandemic. The depressed property asset valuations should offer attractive entry prices for the Islamic REIT and support capital gains in the coming years. Ultimately, Nigeria’s real estate market remains fundamentally strong largely due to the shortage of quality real estate and high population growth. Furthermore, the shortage of public infrastructure should support traditional office and shopping experiences even after the pandemic.
For the Islamic finance industry, the new REIT adds to the expanding universe of assets since the instrument has submitted itself to Shariah scrutiny. It also provides institutions with structured access to real estate investments and increases the opportunities for diversification and inflation hedging.
Nevertheless, the new RIET may not be without its challenges. As with similar debut instruments, liquidity is often slim due to the relatively small size and the tendency of investors to buy and hold. The Islamic REIT manager plans to address this by returning to the market for multiple capital raises over the medium term and therefore liquidity is expected to gradually improve. In my opinion, the REIT may provide another excellent opportunity for non-interest finance institutions to resolve their own peculiar liquidity needs through securitization.
The truth is that the total REIT market in Nigeria is just 0.16% of the total market cap compared to 0.82% in SA and 4.43% in US. Therefore, a non-sovereign Islamic financial instrument such as this in an alternative asset class is very welcome. In a market with very few compliant instruments, it brings both issuer and asset class diversity. After months in lockdown, the Islamic REIT may just be the catalyst needed to stimulate innovation in the Nigerian Islamic and conventional capital markets.