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NSE REAL ESTATE INVESTMENT TRUSTS (REITS) CONFERENCE MAY 23, 2017

The role of the capital market in harnessing this sector’s potential and providing entrepreneurs with access to large, cheap funding for capital intensive projects cannot be overemphasized. Investors typically look to the capital market for credible issuers for wealth creation; while the issuers typically leverage the capital market to attract global investments, resulting in enhanced corporate governance and a diverse pool of investors. Accordingly, REITs can provide investors with competitive long-term rates of return that complement the returns from other stocks and bonds. REITS over time have demonstrated a historical track record of providing a high level of recurrent income (dividends); longterm price discovery; inflation adjusted investment returns and Portfolio diversification benefits. According to the Nigerian Bureau of Statistics (NBS), the Real Estate sector grew by an average rate of 10.28% per quarter, thereby contributing 7.59% to GDP in 2016. Also, according to the World Bank, Nigeria has a housing deficit of 17 million units and will require about N59.5 trillion to fund this deficit. Given that the capital required to bridge the gap may be somewhat overwhelming for the National Housing Fund (NHF), REITs which is a viable and dependable source of unlocking long term funding to the Real Estate sector, must be harnessed to fund and close the growing housing deficit in Nigeria. Globally, REITs market capitalization now stands at approximately US$1.7trn, up from US$734bn in 2010 REITs have been marginally successful in various jurisdictions across African markets. In part, this can be attributed to the early stage of development of the African REITs market, which is largely underdeveloped and fragmented, with inadequate regulatory frameworks to encourage investments. However, the varying performance of REIT markets across the continent may also be attributable to the diverse context in which these markets are emerging. Page 2 of 3 The South Africa REIT legislation was introduced in May 2013 to establish robust regulation and to provide clarity to the market with regards to how real estate entities and their shareholders would be taxed. Its raison d’étre was to provide “transparency, simplicity, flexibility and tax certainty”. Section 25BB of the Income Tax Act effectively allows a REIT to achieve tax neutrality, hence giving rise to a recognizable and understandable structure that has been able to attract foreign investment in the South African REITs sector. Hence, as of January 2017, the South African REIT market comprised of 31 listed REITs with a market capitalization of R320 billion ($27bn). In 2013, Kenya became the third African country to establish a real estate investment trust (REIT) as an investment vehicle. Kenyan REIT regulations provide for two types of REITs, namely Income Real Estate Investment Trust Scheme (IREITs) and Development and Construction Real Estate Investment Trust Scheme (DREITs). Importantly, corporate tax exemption plays a critical role in incentivizing investments into the REIT industry in Kenya. However, in recent years, the REIT market has performed relatively poorly in Kenya. According to Cyntonn Investments (2016), the Kenyan REIT market’s poor performance during 2016 can be attributed to (i) poor returns from the underlying assets (ii) opacity of the exact returns from the underlying assets, (iii) inadequate investor knowledge and lack of institutional support for REITS, and (iv) the negative sentiment currently engulfing the sector given the poor performance of Stanlib’s Fahari IREIT and the failure of Fusion’s Real Estate Development Trust, otherwise known as FRED Commercial. In Nigeria, the REITs market is largely underdeveloped due to lack of clarity on diverse regulatory issues which are required to stimulate greater market confidence, transparency and foreign capital inflows. It is important to note that REITs are still required to pay Companies Income Tax (CIT) at a rate equivalent to 30%. However, certain other pockets of tax exemptions exist, such as the waiver of taxes on asset and mortgage-backed securities. Additionally, the dividends of publicly traded REITs are exempt from withholding taxes (WHT) in the hands of the investor. Value Added Tax (VAT) and Capital Gains Tax (CGT) on sales of these units or securities are also not applicable. The major challenges facing the REITs industry in Nigeria include restrictive legislation, poor knowledge and understanding of the industry in addition to prolonged bottlenecks created by the Land Use Act of 1978. Nigeria’s Land Use Act is embedded in the Constitution of our country. Thus, any attempt to rectify its inadequacies requires a constitutional amendment which of itself is a major challenge. It is therefore imperative to find enduring policies that will attract and stimulate investment in REITs and the Real Estate sector. One of such recommendations could be the establishment of a separate and dedicated Lands registry in each viable State of the Federation, a (REITS registry of sorts) within the existing legal framework to specifically handle all REIT related transactions. This should provide a clear framework for transfer of title and other related issues affecting the issuance of REITs in Nigeria. It has also been submitted by some operators that the gearing ratio of 15% as stipulated by the SEC may be too low and unrealistic given that real estate has a higher unit cost and is backed by a tangible asset. The Page 3 of 3 restriction on REITS acquiring foreign assets is also considered unduly restrictive in some quarters especially in a liberalized foreign exchange regime. I hereby urge the Securities and Exchange Commission, the Nigerian Stock Exchange (NSE), the Federal Inland Revenue Service (FIRS), Market operators and the other stakeholders to continuously engage and seek innovative ways of creating an enabling environment for the development of REITs to thrive while bearing in mind its capacity to (i) deliver stable long term value investment, (ii) meet Nigeria’s rising housing and infrastructure deficit, (iii) attract foreign portfolio investment into the Nigerian Real Estate sector and (iv) support the drive for real estate infrastructure development & diversification from concentration of investments in traditional equities and other fixed income instruments. Taking a cue from the South African REIT story, Nigerian asset managers should continue to be at the forefront of ongoing initiatives to reform the Real Estate sector. More collaboration and synergy is required between the regulators and market operators to share knowledge and experiences in order to close the knowledge gap, eliminate over regulation as well as increase the ease of doing business in the Real Estate sector. More investor education seminars should also be organized to provide in-depth understanding of this distinct asset class. Interestingly, the next presentation and panel discussion will seek to further dimension Regulatory and legal impediments affecting the development of REITs in Nigeria and Sub – Saharan Africa. I look forward to learning of the varied insights and initiatives that will be generated from this and other presentations during the course of this symposium. I take this opportunity to commend the Executive Management of the Nigerian Stock Exchange for this laudable initiative and I encourage all participants and stakeholders to be actively involved during the conference and panel discussions.

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