A Real Estate Investment Trust (REIT) is a public company that pools funds from the
general public through the stock market, and uses such funds to acquire, operate and
finance revenue generating real estate. Such funds are invested in different forms of real estate like hotels, medical centres, office apartments etc.
It is common knowledge that investing in real estate is capital intensive, hence, only a few people invest in it. Real Estate Investment Trust (which is a collective investment scheme) provides a platform for the general public to invest in real estate with no minimum amount. In return for investing, investors are paid yields in the form of dividends.
In Nigeria, Real Estate Investment Trusts are regulated by the Investment and Securities
Act, 2007, under the government agency, Securities and Exchange Commission.
Investing in Real Estate in Nigeria (5)
There are 3 kinds of REITs. The first is Equity REITs. They are the kind that purchase, build and manage income generating real estate. Their major source of revenue is through rents gotten from tenants in their different portfolios of investment.
Mortgage REITs are the second type of REITs. They don't acquire, build or manage property. Being mortgage institutions, they lend money to real estate operators through mortgages and loans. Their major source of income is the interest on the mortgage loan they lend out.
The third category is Hybrid REITs. As the name implies, it is a combination of Equity REITs and Mortgage REITs. This kind invest directly in the acquisition and management of a wide portfolio of property, as well as give out mortgage loans to real estate operators. So before you invest in a REIT, know which kind/type you are investing in. Also, engage the services of a Real Estate Advisor to advise you accordingly.
Pros of REITs over physical/conventional Real Estate
One major advantage of REITs is the low amount of money needed to start investing. Unlike physical/conventional real estate that is capital intensive, there is no minimum amount you can use to start investing in REITs. It gives a low income earner the opportunity to test the waters and see how the investment works.
The second advantage of REITs is diversification of investments. REITs give you the
opportunity to invest in a wide portfolio of real estate property, spread across residential, commercial and industrial real estate.
However, for a new investor in real estate, due to the capital intensive nature of
physical/conventional real estate, it might not be possible (from the onset) to diversify one's investments in these different portfolios.
The third advantage of investing in REITs is liquidity. REITs enable you to buy and sell your stock at the prevailing market price. Once your stock are sold, you can easily receive the money equivalent. However, for conventional/physical real estate, it is not so easy to sell your property. You might need to engage the services of an agent to find a willing buyer, or you market it yourself. Furthermore, the buyer needs to be willing to buy at the price you offer. This takes time and can be a tedious process. It could take you months or years before you sell the property especially in a bad market. Always remember this.
Cons of REITs over physical/conventional Real Estate
One of the cons of REITs is that you lack the ability to control the affairs of your real estate assets. By investing in REITs, you relinquish to the managers/controlling shareholders, the power to make decisions on what property to buy or sell, what property to rent or renovate among others. If on the other hand, you directly own a property, you have the power to fully administer all affairs in relation to your property.
Another con of REITs is the potential for high management and transaction fees. The effect of these high fees is that they reduce the amount of dividend payable to you as an investor. So, take all these into consideration before investing in REITs.