Challenges and Performance of adopting REIT Structure in

Financing Real Estate in Nigeria

By Adetayo B Odunsi

BSc. Estate Management 2007, University of Lagos Nigeria

Submitted to the School of Real Estate and Planning In Partial Fulfilment of the

Requirements of the Degree of Masters of Science in Real Estate Finance and Investment

At the

Henley Business School, University of Reading

August 2011

Project Supervisor: Professor Simon Stevenson

Word Count: 10,791

A. B Odunsi 2011

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DEDICATION

I dedicate this project to my Lord, Saviour and Shepherd Jesus Christ who has made this

possible. Thank You

A. B Odunsi 2011

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ABSTRACT

Within the last decade, many more countries have embraced the concept which started in

Massachusetts in 1960 called Real Estate Investment Trusts. Japan (2001), Bulgaria (2004),

Hong Kong (2005), UK (2006), Germany (2007), Philippines (2009), Finland (2010) and

India is set to join the train soon.

Nigeria, the West African oil giant has not been un-participatory as the necessary legal and

structural framework for REITs was put in place in 2008. It is then research-worthy to

enquire into the lack of patronage of this globally acclaimed real estate finance and

investment structure.

Quantitative methods were engaged in investigating the challenges real estate and finance

professionals may be encountering in adopting the REIT structure. This produced a

consensus that the poor market conditions, lack of expertise and high conversion costs are

the major road blocks.

An empirical approach was then adopted in assessing how REITs in other emerging

economies have performed. South Africa and Turkey were selected for these tests using

vector auto-regression models to examine the responses of REIT prices to some

macroeconomic indicators. It was seen that both REITs behave quite differently. While South

African REITs were seen to be solid defensive, Turkish REITs are sensitive to interest rate

risks. However, the VAR decomposition showed that majority of changes in REITs is caused

by the REITs themselves.

These findings and review of literature go a long way in showing what professionals and

regulators must address and contend with if REITs will create a success story in Nigeria.

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TABLE OF CONTENTS

List of Exhibits………………………………………………………………………………… 6 -7

Chapter One: Introduction………………………………………………………………….. 8

Background of Study………………………………………………………………………….. 8

Economic Background…………………………………………………………………………. 9

Overview of Real Estate in Nigeria…………………………………………………………….11

Statement of Problem……………………………………………………………………………12

Justification of Study……………………………………………………………………………..12

Research questions………………………………………………………………………………12

Aims and Objectives……………………………………………………………………………..12

Organisation of the Report ……………………………………………………………………..13

Chapter Two: Literature Review……………………………………………………………..14

Real Estate Finance……………………………………………………………………………..14

Real Estate Equity Finance……………………………………………………………………..14

Shareholders’ Equity……………………………………………………………………14

Private Equity……………………………………………………………………………14

Joint Venture ……………………………………………………………………………14

Shared Ownerships……………………………………………………………………..15

Fractional Ownership……………………………………………………………………16

Time Share…………………………………………………………………………….…16

Real Estate Investment Trusts…………………………………………………………16

Real Estate Debt Finance……………………………………………………………………….16

Mortgage Loan…………………………………………………………………………..16

Project finance…………………………………………………………………………..17

Sources of Real Estate Finance in Nigeria……………………………………………………18

Primary Mortgage Institutions (PMIs) ………………………………………………..18

Secondary Mortgage Banks …………………………………………………………..18

Commercial Banks……………………………………………………………………...18

Insurance companies……………………………………………………………………19

Pension Funds…………………………………………………………………………...20

Cooperative Societies……………………………………………………………………21

The Informal Sector………………………………………………………………………21

Background of Real Estate Investment Trusts (REITs)……………………………………….21

REITs in South Africa………………………………………………………………………….....22

REITs in Turkey………………………………………………………………………….............24

REITs in Nigeria………………………………………………………………………….............24

Union Homes Hybrid REIT………………………………………………………………………27

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Financial Projections ……………………………………………………………………27

Investment Projections…………………………………………………………………..27

Performance of Union Homes Hybrid REIT……………………………………………28

Chapter Three: Research Method…………………………………………………………….29

Introduction…………………………………………………………………………………………29

Research Approaches…………………………………………………………………………….29

Qualitative Research Approach…………………………………………………………30

Quantitative Research Approach……………………………………………………….30

Mixed Research…………………………………………………………………………...31

Research Design…………………………………………………………………………………..32

Selective Sample Survey………………………………………………………………...32

Performance Analysis ……………………………………………………………….......33

VAR and VEC Models………………………………………………………………........33

Limitations of the Study……………………………………………………………….................33

Chapter Four: Data Analysis……………………………………………………………….......34

Selective Survey Sample………………………………………………………………...............34

Sources of Finance………………………………………………………………..................35

The REIT Structure………………………………………………………………..................36

Performance Analysis of Union Homes Hybrid REIT…………………………………………..37

Vector Auto-Regression Model……………………………………………………………….......38

Data Used………………………………………………………………..................................38

Similarities and Correlation……………………………………………………………….......39

Descriptive Statistics………………………………………………………………................40

VAR Analysis: Co-Integration Tests………………………………………………………….42

VAR Analysis: Lag Length Selection…………………………………………………………43

VAR Analysis: Granger Causality Tests……………………………………………………...43

Impulse Response Functions………………………………………………………………….43

VAR Decompositions…………………………………………………………………………..45

Interpretation of Results………………………………………………………………………..46

Chapter Five: Conclusion………………………………………………………………………..48

Summary…………………………………………………………………………………………….48

Conclusion and Recommendations………………………………………………………………50

Areas for further Study……………………………………………………………………………..51

References

Appendix

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LIST OF EXHIBITS

Exhibit 1.1 - Nigeria: GDP Growth………………………………………………………………..9

Exhibit 1.2 - Nigerian Population………………………………………………………………….10

Exhibit 1.3 - Key Players in the Nigerian Real Estate Market…………………………………11

Exhibit 2.1 - Mortgage outstanding as % of GDP (2006)………………………………………17

Exhibit 2.2 - Credit to core private sector…………………………………………………………19

Exhibit 2.3 - Total Insurance Business Investments (N Million)………………………………..20

Exhibit 2.4 -Total Pension Assets (N' billion)…………………………………………………….20

Exhibit 2.5 -Differences between South African PLSs and PUTs……………………………..23

Exhibit 2.6 -Summary: Comparison of South African, Turkish and Nigerian REITs…………25

Exhibit 2.7 -Tax treatment at REITs level………………………………………………………...26

Exhibit 2.8 -Tax treatment at Shareholders level………………………………………………..26

Exhibit 2.9 -Structure of REITs in Nigeria………………………………………………………..26

Exhibit 3.1 –Research Design/Structure………………………………………………………….32

Exhibit 4.1 -Type of companies surveyed………………………………………………………..34

Exhibit 4.2 - Cadre of Respondents………………………………………………………………34

Exhibit 4.3 - Respondents’ Sources of Finance…………………………………………………35

Exhibit 4.4 - Currently considering adopting REIT structure…………………………………..35

Exhibit 4.5 - Respondents encountering challenges adopting REIT structure………………36

Exhibit 4.6 - Challenges encountered in adopting REIT Structure in Nigeria………………..36

Exhibit 4.7 - Respondents considering adopting REITs in future………………………………37

Exhibit 4.8 - 3-Year Financial Projects of Union Homes Hybrid REIT………………………...37

Exhibit 4.9 - Financial Summary of Union Homes Savings and Loans Plc…………………..38

Exhibit 4.10 - Definition of variables and their data sources……………………………………39

Exhibit 4.11 - Inflation: Nigeria, South Africa and Turkey (2006:2011Q2)……………………39

Exhibit 4.12 - Inflation Rates: Correlation………………………………………………………...39

Exhibit 4.13 - Interest Rates: Nigeria, South Africa and Turkey (2006:2011Q2)…………….40

Exhibit 4.14 - Interest Rates: Correlation…………………………………………………………40

Exhibit 4.15 - REIT Index: South Africa and Turkey (2006:2011Q2)………………………….40

Exhibit 4.16 - REIT Index: Correlation…………………………………………………………….41

Exhibit 4.17 – Probability Distribution of South Africa REIT Returns………………………….41

Exhibit 4.18 - Probability Distribution of Turkish REIT Returns………………………………..42

Exhibit 4.19 - Co-integration Tests………………………………………………………………..42

Exhibit 4.20 - South African REIT Impulse Response………………………………………….44

Exhibit 4.21 - Turkish REIT Impulse Response………………………………………………….45

Exhibit 4.22 - South Africa: VAR Decomposition……………………………………………….46

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Exhibit 4.23 - Turkey: VAR Decomposition……………………………………………………46

Exhibit 5.1 - Summary of Survey findings……………………………………………………..48

Exhibit 5.2 - Ranking of Challenges to adopting REIT structure in Nigeria………………..49

Exhibit 5.3 - Summary of VAR Analysis findings………………………………………………50

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CHAPTER ONE: INTRODUCTION

Background of Study

The purpose of this study is to investigate the challenges of adopting the Real Estate

Investment Trust (REIT) structure in financing real estate in Nigeria. The study further aims

at assessing the performance of REITs in other emerging economy with a consideration at

making inferences to the Nigerian situation.

Globally, indirect investment in Real estate has become a major medium through which real

estate finance is readily sourced. While there are various real estate securities and indirect

real estate classes, Real Estate Investment Trusts (REITs) in particular is a key indirect real

estate class and forms an important part of investors’ diversified portfolios (Aktan and Ozturk,

2008).

In 2008 due to the agitations and moves made by the Nigerian Security and Exchange

Commission (SEC), The Nigerian Investments and Securities Act 2007 (ISA 2007) was

passed into law by the government. This legislation provided the legal and organisational

framework for investment in real estate using the REIT structure in Nigeria. It also further

provided for Real Estate Investment companies (REICs).

This structure is laced with benefits to both investors and real estate/finance professionals

who are seeking new media to finance their real estate developments, loans and mortgages.

To Investors, REITs provide a way to invest in real estate without actively owning a property.

It also helps bring a great level of professionalism and transparency to real estate

investment. This is because REIT managers must be skilled, experienced real estate finance

professionals who have been approved and registered with the Securities and Exchange

Commission (SEC). REIT’s Performance is monitored regularly by analysts, auditors and

SEC. Institutional Investors also find REITs attractive as they have been shown to provide

portfolio diversification benefits thereby reducing overall portfolio risk.

To Real estate professionals REITs are a means of generating stable and long-term capital

for real estate transactions. In addition, the ISA 2007 provides significant tax advantages for

Nigerian REITS (N-REITs) which further make them a beneficial source of capital for real

estate financiers and developers.

It is thus interesting to note that there is only one listed REIT in the country- Union Homes

Hybrid REIT.

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Economic Background

Nigeria is located in the western part of Africa, bordering the Gulf of Guinea, between Benin

and Cameroun at 10 00 N, 8 00 E and has a total area of 923,768 sq km. According to July

2011 estimates, Nigeria has a population of about 155 million people and is the fifteenth

largest producer of crude oil in the world at 2.2million barrels per day (CIA, 2011).

It also has enormous natural gas reserves, vast agricultural lands, natural resources and a

dynamic private sector. Until the mid-late 1970’s, the Nigerian economy was based on

agricultural and trading activities. Since then, it has become heavily dependent on earnings

from oil, which account for more than half of Federal Government revenue and over 90% of

export earnings. Agriculture however employs over two thirds of the population, and

accounts for a third of the GDP.

After gaining independence in 1960, the many years of military rule in Nigeria had

devastating effects on its economy. This era was characterized by haphazard economic

planning, distorted policies distorted, and undermined implementation processes as well as

corruption, fraud and general mismanagement (Mudasiru, 2001). As a result, there were

large fiscal deficits, decaying infrastructure, declining industrial capacity utilization, inefficient

public utilities, low quality of social services, external debt overhang, and significant

unemployment.

Nigeria GDP Growth

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

GDP Growth

Exhibit 1.1 Source: Global Finance 2011

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These significantly increased the transaction costs of business as well as eroded Nigeria’s

competitiveness in the sectors where it traditionally possesses comparative advantages. The

overall consequence has been stagnant economic performance, with GDP growth barely

keeping pace with the population growth rate.

Since the return to democratic governance in 1999, policies have been initiated to tackle the

problems above, and lay the foundations for sustainable economic growth. The Economic

blueprint tagged NEEDS- National Economic Empowerment Development Strategy

cumulated in the enactment of several reforms such as privatization, monetization,

deregulation, recapitalization, recertification and consolidation.

Nigerian Population

0

20

40

60

80

100

120

140

160

180

200

1980 1990 2000 2010* 2015**

Population (million)

Exhibit 1.2 Source: Global Finance 2011

Furthermore, the country took a giant step in the right direction when in 2005 the Paris club

forgave $18 billion of debt in exchange for $12 billion in payments – amounting to $30 billion

of Nigeria's total $37 billion external debt. Since 2008, the Nigerian government has shown

commitment towards market-focused reforms as directed by the IMF. These include; the

inflation reduction, modernization of the banking system, and resolving regional disputes

over the distribution of crude oil earnings.

The Nations GDP grew significantly in 2007-10 due to increased demand and global crude

prices in 2010 among other reasons. It is ranked 137 out of 183 economies for the ease of

doing business (World Bank, 2011) and a B+ rating (Standard &Poor’s, 2011)

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Overview of Real Estate in Nigeria

As in most countries, real estate continues to be a dependable source of income, a hedge

against inflation and a readily marketable commodity. The sector remains one of the most

high yielding and fastest growing sectors in the Nigerian economy.

With the return of democratic governance, the real estate sector has experienced increased

activity across the board. This is underpinned by the huge pent up demand created by

insufficient supply in the face of rising demand. For instance, the housing deficit in Nigeria

was estimated at between 14 – 17 million up from 8 million in the 1980’s (Omirin and Nubi

2007).

The recent rise in activity has largely been driven by the increasingly affluent population, the

introduction of mortgages, increased FDI and policy reforms by Federal and State

Governments. The condition of the housing sector and the supply/demand imbalance in real

estate generally has led to great opportunities in the sector.

However, as with other emerging economies scarcity and high cost of capital has been a

major issue. Major players in the Nigerian Real Estate Market include; Property

development/Investment companies, construction companies, real estate professional

service providers such as; Architects, Quantity Surveyors, Land Surveyors, Estate Valuers

and Town Planners. Real estate finance is provided by money deposit (commercial) banks,

mortgage banks, Insurance companies and Pension funds.

Key Players in the Nigerian Real Estate Finance Market

Exhibit 1.3 (Pison Housing company, 2008)

Regulators

Central Bank of Nigeria

Federal Ministry of Lands, Housing and Urban Development

Securities & Exchange

Commission

Financial Institutions

Federal Mortgage Bank of Nigeria

> 99 Primary Mortgage Institutions

24 Deposit Money Banks

Developers

Federal Housing Authority

36 State Housing Corporations

36 State Ministries of Lands, Housing & Urban

Development

> 800 Real Estate Developers

> 55 Insurance Companies

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Statement of Problem

According to Moss, the housing finance and indeed real estate finance system of most

nations consists of three markets: the primary mortgage market, the secondary mortgage

market, and the capital market. In the primary mortgage market, mortgages are created and

funds are loaned directly to borrowers. In the secondary mortgage market, lenders and

investors buy and sell existing mortgage loans and mortgage-backed securities (MBS). In

the capital market, investors buy and sell long-term investment vehicles such as REITs,

MBSs, stocks, and bonds.

If the dearth of real estate finance in Nigeria must be rebuffed, challenges that are being

faced by industry players in accessing the capital market with instruments such as REITs

must be identified and addressed.

Justification of Study

REITs where first created in the United States of America by the US Congress in 1960 for

the purpose of providing investors an opportunity to invest in real property as well as to

create liquidity for real estate developments and mortgages.

REITs have only recently surfaced in Nigeria 48 years down the line and is still yet to

generate as much awareness, research and sophistication as several other investment

instruments and sources of finance.

This research work is undertaken as one of the premier enquiries into REITs with regard to

the Nigerian context, while making inferences from other nations within Nigeria’s league who

tend to have more developed REIT markets.

Research questions

1. Are there challenges in adopting REIT Structure in financing Real Estate in Nigeria?

2. How have REITs performed in Nigeria?

3. How have REITs in other emerging markets performed?

Aims and Objectives

To evaluate the challenges of adopting the REIT structure as a means of financing real

estate in Nigeria as well as assess the performance of REITs in the country.

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Organisation of the Report

This research work is broken down into 5 chapters. These are as follows;

Chapter 1 Introduction

This chapter provides a conceptual, contextual and economic background to the research

work. It also outlines the research aim, objectives, questions and limitations.

Chapter 2 Literature Review and Theoretical Framework

The literature review discusses the major sources of real estate finance based on the two

broad categories of finance, namely; debt and equity. The discourse progresses in a

pyramid-like manner towards REITs with a focus on the structure, legal framework and

performance of REITs in South Africa, Turkey and Nigeria.

Chapter 3 Research Methodology

The methods adopted in carrying out this research work, are discussed and described here.

A mixture of qualitative and quantitative research methods was adopted and both primary

and secondary data are secured from varied sources. This was undertaken as a blend of

desk and field work.

Chapter 4 Data Analysis and Interpretation

In this chapter the results obtained in chapter three are interpreted. Inferences and

deductions are also made.

Chapter 5 Conclusion

Here a final summary of the research findings is given. A review of the research objectives is

done and in conclusion it states if these objectives have been met. Recommendations are

made and areas of further future research are also suggested.

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CHAPTER TWO: LITERATURE REVIEW

Real Estate Finance

Real estate finance can be classified into three categories; financing of land, construction

finance i.e. funding of the property built on the land, and thirdly, financing the occupation

/user of the property (Akaneme, 2011). All three categories often pose unique financing risks,

dynamics and constraints.

Real estate assets account for between 7 – 20 percent of GDP in most countries while

housing expenses account for between 15 – 40 percent of the average household monthly

expenditure (OPIC 2000). These show that real estate finance is a major feature in every

household or organisation. Irrespective of the category of real estate finance, the two main

benefits of investing in real estate are capital appreciation of the asset and rental income

(Bodie et al, 2002).

Real estate finance is the class of financing which is specific to the funding of real estate and

it’s crucial for the emergence of cities, towns and organised society. Like in general finance,

there are two broad categories of finance available, these are; debt and equity finance.

Financing of a property or real estate project by debt or equity depends on the

characteristics of asset being financed and the transaction.

Real Estate Equity Finance

Shareholders’ Equity

This is the portion of a company that is financed by common and preferred shares. It is

represented on a company’s balance sheet as its total assets minus its total liabilities.

Private Equity

These are equity securities in companies that are not publicly traded on the stock exchange.

Private equity positions are usually taken by private equity firms, venture capital firms and

angel investors to attain wide range of goals and investment strategies. Such injected equity

is usually provided to increase working capital, enable expansion and product development

or to restructure the target company’s operations, ownership or management.

Joint Venture

A joint venture is a business arrangement type in which parties agree to develop, for a finite

time, a new entity and new assets by contributing equity. The parties jointly exercise control

over the enterprise and consequently share revenues, expenses and assets. Joint ventures

A. B Odunsi 2011

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create an opportunity for companies or individuals to partner without having to merge and in

some cases helps the parties avoid debt. JVs are usually taxed as a partnership.

In real estate, joint ventures are typically structured between a Land-owner and a Developer.

The Land owner contributes his land as equity in the project while the Developer contributes

his funds and expertise in carrying out development. Each party’s income is proportionate to

its contribution and this is usually based on pre-determined terms.

In larger real estate projects, other professionals involved in the development process may

also be party to joint ventures where their professional services are seen as equity

contribution and rewarded upon completion of the project.

Shared Ownerships

Shared ownership is a contemporary method of buying stake in a property when funds are

not available for an outright purchase. Shared ownerships are very popular in European

countries where they are offered for sale by housing associations which are not-for-profit

organisations.

This is a home ownership structure where a purchaser buys a share of a property, and pays

rent on the remainder which he doesn’t own. The rent paid is called a ‘specified rent’ which

is a percentage of the fair market value on the proportion that is not owned by the purchaser.

The purchase price paid will be a percentage of the market value which corresponds with the

share to be received. The lease will typically contain a provision that allows the purchaser to

buy additional shares at anytime during the term until he owns the 100% owns the property.

This is known as “stair-casing”. The purchasers’ monthly outgoings will include repayments

on any mortgage taken out, plus rent on the part of the property retained by the housing

association.

Fractional Ownership

Fractional ownership is an investment structure where the investor owns part/fractions of the

title of an asset. As such, when the asset increases in value, so does the value of the shares

in the investment. Fractional ownership fragments a property into more affordable units for

individuals and also matches an individual's ownership time to their actual usage time.

Fractional ownership has been in practice for many years; when family and friends shared

ownership of vacation property, aircrafts, sports cars and other expensive assets. The

fractional property industry started in the US in the early 1990s when it was realised that

A. B Odunsi 2011

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people did not want to out-rightly purchase whole homes in the Rocky Mountains Ski

Resorts since they would only use it for just a few weeks a year.

Time Share

A timeshare is a type of ownership or right to the use of a property where different people

own allotments of time to use the same property. This model is often applied to

condominiums, homes, resort properties and camp grounds. Owners can decide to use their

usage time, rent it out, give it as a gift or even donate it to a charity. Owners can also

exchange their time allotments internally or externally with other allotment holders or sell

their time share out-rightly.

Real Estate Funds

A real estate fund is a mutual fund that invests primarily in real estate to produce income and

capital gains for its holders. The real estate funds industry has experience phenomenal

growth both numerically and in value appreciation of funds over the last 15 years (Deloitte,

2010)

Real Estate Investment Trusts

Individuals can invest in REITs either by purchasing their shares directly on an open

exchange or by investing in a mutual fund that specializes in public real estate. An additional

benefit to investing in REITs is the fact that many are accompanied by dividend reinvestment

plans (DRIPs). Among other things, REITs invest in shopping malls, office buildings,

apartments, warehouses and hotels. Some REITs will invest specifically in one area of real

estate - shopping malls, for example - or in one specific region, state or country. Investing in

REITs is a liquid, dividend-paying means of participating in the real estate market.

Real Estate Debt Finance

Mortgage Loan

A mortgage loan is a loan to purchase a property whereby the loan is secured by the

purchased property. Mortgages are a major source of funding for the occupation of houses,

offices and retail space all over the world. According to the 2001 census in England, 29% of

the populace owned their homes outright while 39% financed their homes with a mortgage

(UK, National Office of Statistics). Construction mortgages have also gained popularity in

financing the construction of developments where the loan is secured by the constructed

property.

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Boleat (2008) postulates a strong correlation between economic development and the size

of the mortgage market.

Mortgage outstanding as % of GDP (2006)

2%

2%

4%

14%

18%

23%

37%

60%

52%

68%

86%

72%

90%

0% 20% 40% 60% 80% 100%

Morocco

Nigeria

India

Korea

Thailand

Malaysia

Taiwan

Hong Kong

Germany

Singapore

USA

UK

Denmark

Mortgage Outstanding as % of GDP

Exhibit 2.1 Source: Saravanan (2007) and Akinwunmi et al (2008)

Project finance

Wynant (1980) defined project finance as “a financing of a major independent capital

investment that the sponsoring company has segregated from its assets and general

purpose obligations”. Furthermore, the World Bank defines project finance as the “use of

nonrecourse or limited-recourse financing.” Project finance is non-recourse as the lenders

are repaid strictly from the proceeds of the project or, in the event of failure of the project,

from the value of the project’s assets.

Project finance is usually adopted for capital intensive projects and it predates corporate

finance where permanent capital is entrusted to Managers who would decide between

paying dividends and reinvestment at the end of every financial period.

Apart from infrastructure and industrial projects, complex real estate projects such as

shopping centres, hotels, office blocks and multi-level car-parks are often funded through

project finance.

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Sources of Real Estate Finance in Nigeria

Though fragmented and scarce, there are varied sources where debt or equity capital can be

raised to finance real estate transactions in Nigeria.

Primary Mortgage Institutions (PMIs)

These are called Mortgage Banks or Savings and Loan Associations in several parts of the

world. In Nigeria, the promulgation of the Mortgage Institutions Decree No. 53 of 1989

provided the regulatory framework for the establishment and operation of PMIs by the

private sector. According to the Decree PMIs are to mobilize savings from the public and

grant housing loans to individuals. As at January 2011 there were 101 PMIs in Nigeria

however over 50% of them are located in Lagos metropolis.

Secondary Mortgage Banks

The major Secondary Mortgage Bank in Nigeria is the Federal Mortgage Bank of Nigeria

(FMBN) started operation in 1977. It was given the mandate to carry out the following main

functions: The provision of long term credit facilities to mortgage institutions in the country,

the encouragement and supervision of the activities of the mortgage institutions, provision of

long term loan to individual and property developers for house building, produce saving

facility and to carry out research on mortgage finance. These activities have however been

marred by administrative ineptitude, political instability and uncoordinated policies

(Akinwunmi 2008)

Commercial Banks

These are financial institutions and intermediaries that provide transactional, savings, and

money market accounts for customers. Commercial banks in Nigeria are largely retail by

operation. They often only lend on short-term basis because they have to meet withdrawal

requests of depositors at the shortest notice. This has not been compatible with real estate

finance as real estate requires long term finance thereby limiting the success of commercial

banks in this regard.

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Insurance companies

Insurance companies play an important role as providers of capital for real estate from an

equity (owner) standpoint. Insurance companies lend to PMIs or commercial banks then lend

to the end borrower. Typically, Insurance companies normally specialize in large-scale

projects and mortgage packages or make time-deposits.

Insurance companies generate liquidity from the payment of premiums by their policyholders

and since both the inflow of premiums and the outflow of claim payments can be predicted

with reasonable accuracy, they are able to invest in higher yielding assets.

In the US, Insurance companies have historically invested between 25 and 30% of their

assets in mortgages while they have invested an average of 21% in real estate and

mortgages in Nigeria.

Credit to core private sector

Year 2006 2007 2008 2009

% % % %

1 Priority sector 30.30 25.90 26.20 24.50

Agriculture 2.20 3.20 1.40 1.40

Solid minerals 10.10 10.70 11.30 12.30

Exports 1.20 1.40 1.00 0.50

Manufacturing 16.90 10.40 12.50 10.30

2 Less preferred sectors 46.20 41.20 42.00 45.50

Real estate 5.90 6.20 6.20 8.00

Public utilities 0.90 0.60 0.60 0.80

Transportation and Communication

7.60 6.80 7.20 8.00

Finance and Insurance 4.60 9.40 9.50 12.70

Government 4.50 3.70 1.90 3.60

Imports and Domestic Trade 22.50 32.90 31.80 12.40

3 Unclassified 23.70 32.90 31.80 30.00

Total 100 100 100 100

Exhibit 2.2 (Central Bank of Nigeria, 2010)

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Total Insurance Business Investments (N Million)

0 40,000 80,000 120,000

Govt. Securities

Stocks & Bonds

Real Estate & Mort.

Policy & Other Loans

Cash Deposits & Hand

Bills Of Exchange.

2006

2005

2004

2003

2002

Exhibit 2.3 Source: National Insurance Commission, 2008

Pension Funds

On the 25th June, 2004, the Pension Reform Act 2004 was enacted by the Nigerian

government ordering every form of employment to mandatorily participate in the

Contributory Pension Scheme for payment of retirement benefits of its employees. With

about 26 registered PFAs in Nigeria and less than 10% of Nigeria’s working population

signed on to the pension scheme, there are significant opportunities for growth in the

country’s pension industry (BGL, 2010)

Total Pension Assets (N' billion)

47

121

265

815

1072

1300

0 500 1000 1500

2004

2005

2006

2007

2008

2009 sept

Total Pension Assets (N' billion)

Exhibit 2.4 Source: Pencom, 2010

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The Pension Fund Administrators (PFA) collects funds from employers and employees

towards their retirement. This gives them access to long term funds and put them in good

position to finance real estate development. However, the Nigerian pension reform is

modelled after the Chilean Pension law as such there are significant restrictions on investible

assets of pension funds which include embargo on direct investment in real estate.

Cooperative Societies

Cooperative societies pool individual members’ resources from where soft loans are

advanced to their members. They are popularly called ‘Ajo’ in southern parts of Nigeria or

‘Esusu’ in the east. Such funds are often used in purchasing land or carrying out renovation

works on existing property.

The Informal Sector

The informal sector of an economy is classified by the extent to which the government is

functionally aware of its activities (Akanji, 1998). Nubi (2000) suggests that this sector

amounts to about 60% of Nigerian urban labour force. Profits of the informal sector are

neither taxed nor are they captured in the national income accounts. Sources of informal real

estate finance include; personal savings, family loans, individual moneylenders, informal

clubs and religious societies.

There are several investors who constantly lend money to real estate or any other form of

business venture. These investors are individuals or groups with available funds which may

range from small to large-scale, seeking mortgage ownership and equity positions in real

estate. It is thus possible to raise equity capital through syndication instead of relying solely

on mortgage funds

Background of Real Estate Investment Trusts (REITs)

A Real Estate Investment Trust is traditionally a closed-end fund created to hold real estate,

mortgages or a mixture of both (Chan et al 2003). As such there are three main classes of

REITs. These are:

Equity REITs- The trust invests strictly in real estate and generates revenue principally from

rental income and capital gains from the sale of portfolio properties.

Mortgage REITs- The trust loans money for mortgages to real estate owners or purchase

existing mortgages or MBS. Their revenue comes principally from interest earned on their

mortgage loans.

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Hybrid REITs- are REITs that investment in both real estate and mortgages being a

combination of Equity and Mortgage REITs.

REITs have transformed how real estate was traditionally financed (equity and debt) and

acted as a catalyst for the integration of real estate capital markets into general capital

markets (Oreagba, 2010). Prior to the creation of REITs, Investors could only purchase real

estate from the real estate market and this often required a large capital outlay. However

REITs allow investors to purchase units in properties on the stock market and to the tune of

the amount the investor wants to invest. While REITs traditionally were closed-ended funds,

modern variants of REITs allow them to be structured like operating companies whose major

holdings is in real estate or mortgages.

A major attraction of REITs is that it is tax exempt on the corporate level. While corporations

are taxed on their income, REITs are not. The implication of this is that investors would tend

to invest in REITs over a long period and only by taxed when selling their shares (Sebehela,

2007)

REITs in South Africa

In South Africa, there are two products that have very close resemblance to REITs as known

globally. These are Property Loan Stocks (PLS) and Property Unit Trusts (PUT). They are

both listed property vehicles are listed on the JSE under “Financials – Real Estate”.

Property unit trusts (PUT) are perhaps the more REIT-like of the two. A Property unit trust

is a portfolio of investment grade properties which generate cash-flow from the portfolio's

rental income in the short term, while the value of the units themselves increase in the longer

term, as the value of the underlying properties increase.

PUTs are managed by management companies, responsible both for the day-to-day

operation of the properties and also the trust. There are currently six listed trusts, with a total

market capitalisation of over R24-billion (APUTSA, 2011). The prices of listed PUTs are

quoted on the JSE Limited (SA) and are published in the media under the "Real Estate"

heading.

Common features between PUTs and REITs, include the distribution of income from the

property investments in the form of net rental or an interest distribution, restrictions on the

type of assets that the trust invests in (typically types of property investments); guidelines on

A. B Odunsi 2011

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the amount of income that needs to be distributed; and limitations on the level of debt on the

balance sheet. A property unit trust can borrow only 30% of its total net asset value.

According to APUTSA, PUTs are not regulated by a specific Act or regulatory framework but

rather a combination of statutes. These include;

� Johannesburg Stock Exchange (JSE) Listings requirements

� Collective Investments Schemes Control Act No.45 of 2002

� Standard Trust Deed (which is usually formed by the trustees of the trust)

On the other hand, Property loan stock companies are governed by their own memorandum

and articles of association. As with all other companies property loan stocks are subject to

the Companies Act and the JSE regulations. A significant difference between property loan

stock companies and other companies is the way its owners fund the company.

Each linked unit in a property loan stock comprises part share and part debenture

(loan). The debenture (loan) portion of the linked unit earns interest at a variable rate. The

interest comes from net income (after expenses) which the loan stock company achieves

from rental streams from the properties in which the company invests.

Usually property loan stocks distribute majority of their revenue profits through debenture

interest while the balance is paid out as a dividend. These distributions are regular, providing

steady cash stream for investors and are tax transparent.

PUTs can gear up to thirty percent of the asset value of its portfolio. PUTs must be listed on

the JSE however it is not mandatory for PLSs to get listed. There are 5 PUTs and 23 PLSs

listed on the JSE. In overall PUTs are more regulated than PLSs (Sebehela, 2007)

Differences between South African PLSs and PUTs

Property Loan Stock Property Unit Trust

Regulation Companies Act Financial Services Board

Management Internal or external External

Capital Structure Linked units (Debenture linked to shares)

Participatory units

Gearing No restrictions (Articles) Max 60% gearing

Payout ratio No restrictions (Trust deed) 100%

Representative Organisation

Property Loan Stock Association (PLSA)

Association of Property Unit Trusts (APUT)

Exhibit 2.5

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REITs in Turkey

Real estate Investment Trusts emerged in Turkey in 1995 when the Capital Markets Board

(CMB) published the “Principles Communiqué pertaining to Real estate Investment Trusts”.

In 1996, the first REIT was established and by 2003 there were 9 REITs listed on the

Istanbul stock Exchange (ISE). In 1998, the legal framework for REITs was amended and

REITs were obligated to make at least 49% of their stocks public. This new law made

Turkish REITs more institutional and transparent.

Turkish REITs are relatively liquid due to the high ratio of float to market capitalization and

the high daily transaction volume. Turkish REITs account for 1.27% of the daily turnover of

the ISE which is significantly higher than US-REITs which account for only 0.01% of the daily

turnover of the NYSE (Aydinoglu, 2004). However US-REITs have a much larger market

capitalization than Turkish REITs.

Turkish REITs must deal primarily in portfolio management. As such they must not engage

in construction, operation of hotels, shopping centres, hospitals etc, and cannot provide

services to individuals or organisations. They cannot engage in any form of banking,

commercial, industrial, or agricultural activities. Investments in foreign investments (both real

estate and capital market instruments) must not exceed 49% of the REITs portfolio value.

A REIT in Turkey may secure debt up to 3 times the net asset value of its portfolio.

REITs in Nigeria

The Investments and Securities Act of 2007 (ISA), provided the legal framework and

corporate structure for the creation of Real Estate Investment Trusts in Nigeria. This came

as a result of agitations by the Nigerian Stock Exchange (NSE) and the Securities and

Exchange Commission (SEC) to create products that provide diversification benefits for

investors in the stock market.

Section 158(1c) of the ISA 2007 provides that ‘the Commission may approve a collective

investment scheme which is administered as a real estate investment company or trust.’

According to the Act a REIT or REIC must have a minimum of 75% of its total assets directly

invested in real estate. The level of development activity which the Trust or Company may

engage in directly is pegged at 20% of its asset value while gearing is limited to 15%

A. B Odunsi 2011

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The law also requires that REITs/REICs prepare Independent valuation reports every 2

years and also the fund manager is to prepare a quarterly performance report while the

trustee is to prepare half yearly reports. A REIT is expected to provide a rating report every 2

years.

Section 195(1) of the ISA 2007 permits foreign REITs to solicit investment from Nigerian

Investors however Nigerian REITs must seek the approval of SEC to solicit investment in

any foreign collective investment (Section 195(2), ISA 2007). Under the law, Nigerian REITs

are not permitted to make investments outside Nigeria in real estate or any other asset class.

Requirements for registration of Nigerian Real Estate Investment Trusts (N-REITs) are spelt

out in Section 194 of the ISA 2007 and it states:

“A real estate investment company or trust may be registered by the commission if it: (a) is a

body incorporated under the Companies and Allied Matters Act. (b) Has a capital and

reserve as prescribed by the commission from time to time. (c) Carries on business as a

collective investment scheme solely in properties. (d) Complies with the requirement

prescribed by the Commission through its rules and regulations made from time to time.”

Requirements for the registration of units of N-REITs include but are not limited to a

minimum underwriting commitment of 35% from issuing house as well as a minimum 60%

subscription for to get SEC clearance. The REIT must have a minimum of 300 subscribers to

be listed on the Nigerian Stock Exchange.

Summary: Comparison of South African, Turkish and Nigerian REITs

South Africa Turkey Nigeria

Name Property Unit Trusts Turkish REITs Nigerian REITs

Year Started 1969 1996 2008

Number (2011) 5 13 1

Mkt. Cap. (2010) $3.4 billion $1.89 billion

Regulator Johannesburg Stock

Exchange

Capital Markets Board Securities Exchange

Commission

Legal Entity Trust Joint Stock Company Trust or Company

Min. Share Cap. 7.2 Million TRY

Activities Portfolio and property

management

Strictly portfolio

management

Portfolio mgt.,

property mgt. & devt.

Foreign

Investments

Permitted Max. 49% of Asset in

Foreign Investments

No Foreign

Investments

Debt Limit Max. 30% of NAV Up to 300% of NAV Max. 15% of NAV

Dividend

Distribution

No Limit Minimum 20% Minimum 75%

Exhibit 2.6

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Tax treatment at Shareholders level

Corporate shareholder Individual shareholder Withholding Tax

Nigeria Discounted tax Discounted tax Taxable

South Africa 12.5% 0 -10% Taxable

Turkey Taxable (20%) 50% of income subject to

tax (15 -35%)

N/A

Exhibit 2.8

Structure of REITs in Nigeria

Exhibit 2.9 (Goldman Assets, Nigeria Stock Exchange, 2009)

Tax treatment at REITs level

Income Tax Capital Gains Tax Withholding Tax

Nigeria Tax exempt on portion

distributed as dividends

Tax exempt to the extent

that they are distributed

as dividends

Taxable

South Africa Taxable (40%) Tax exempt to the extent

that they are distributed

as dividends

Tax exempt

Turkey Tax exempt Tax exempt Tax exempt Exhibit 2.7

Net Property Income Ownership of Assets

Investments in

REITs units

Principal and

Interest

Acts on Behalf of

Unit holders

Commercial

Properties

Unit Holders - Institutional Investors - Individual Investors

REIT

REIT Fund Manager

Property Manager

Property Management Services

Trustees

Debt Finance

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Union Homes Hybrid REIT

Union Homes Hybrid REIT was the first and only REIT to be created in Nigeria as at August

2011. The initial public offer was made by Union Homes Savings and Loans Plc on August

19, 2008 and Closed September 25, 2008. The company offered for subscription

970,873,787 Units at an issue price of N51.50 per unit. Investors were required to pay the

full amount of the issue price on application.

The REIT was constituted under a Trust Deed as a closed-ended unit trust scheme with

aims to achieve long-term capital appreciation of assets by investing in a portfolio of both

real estate and mortgage assets. In total, a minimum of 90% of its assets will be invested in

real estate and real estate related assets and a maximum of 10% will be invested in quality

money market instruments.

Financial Projections

As at the time of offer, the financial projects of the REIT were as follows;

YEAR I YEAR II YEAR III

N '000 N '000 N '000

GROSS INCOME 3,324,178 6,345,579 6,770,149

LESS EXPENSES 878,550 1,036,365 1,044,182

NET INCOME 2,445,628 5,309,214 5,725,967

PROVISION FOR TAX 782,601 1, 698,948 1,832,310

DISTRIBUTION @ 90% 1,496,724 3,249,239 3,504,291

UNDISTRIBUTED INCOME 166,303 361,027 389,366

EARNINGS PER UNIT (EPU) 171K 372K 401K

DISTRIBUTIONS PER UNIT (DPU) 154K 335K 361K

Investment Projections

The REIT projected to be geared up to 15% of the value of the real estate assets. A

maximum of 50% of the portfolio's assets at market value was projected to be invested in

any one real estate sub-sector with Investments ranging from N200 million to N5 billion in

size. The fund manager projected at allocating approximately 70% of the REIT's portfolio to

core investments, which are generally lower risk (already developed properties with at least

80% occupancy) while approximately 30% of its assets will be injected in value-added

properties, which are higher-yield/risk investments.

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Performance of Union Homes Hybrid REIT

According to the abridged time-table at the time of offer, the REIT was projected to be listed

by Mid-December 2008. However it wasn't until Friday 2nd July, 2010 that Union Homes

listed 250,019,781 units of 50 Naira each at N51.50 per share at the Lagos floor of the

Nigerian Stock Exchange (NSE). This shows that only about 26% of the units allotted were

subscribed for. This includes the 10% mandatory subscription of the total fund size by the

REITs sponsor as mandated by the SEC regulations guiding collective investment schemes.

As such it can be inferred that the general public subscribed to a maximum of 16% of the

REIT.

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CHAPTER THREE: RESEARCH METHODOLOGY

Introduction

The previous chapter reviewed several concepts and literature within the context of this

research endeavour. Particularly on types and sources of real estate finance as well as

REITs in Nigeria and two other emerging economies; South Africa and Turkey. This chapter

outlines the research approach, methodology and design adopted to answer the research

questions posed.

Research Approaches

There is no one-size-fits-all approach to carrying out a research work. It has often been

stated that the paradigm adopted by a researcher shapes the way he perceives the world

(Lakatos 1970, Feyeraband 1978). The choice of approach is determined by the type of

research questions posed and the type of answers these questions require. (Denzin &

Lincoln 1994; Aghaunor et al, 2002).

As stated earlier, the research questions are as follows;

4. Are there challenges in adopting REIT Structure in financing Real Estate in Nigeria?

5. How have REITs performed in Nigeria?

6. How have REITs in other emerging markets performed?

Different approaches have been taken to answer the three questions enumerated above.

Research is largely a process of theory testing and in social and behavioural sciences this

could be exploratory of confirmatory research (Onwuegbuzie and Tedlie 2003). Exploratory

research is conducted when a problem has not been clearly defined or when its scope is not

yet clear. It allows for familiarization and progressive elaboration of the problem or concept

to be studied.

Exploratory research helps determine the best research design, data collection and selection

method. An explorative investigation is appropriate when a research problem is unstructured

and difficult to de-limit (Aghaunor et al 2006). Confirmatory research is conducted where

there is a clear understanding of a problem. There is a theory and the objective of the

research is to find out if the theory is supported by the facts. The main objective of

exploratory research is theory initiation and theory building while confirmatory research

focuses on theory testing.

.

A. B Odunsi 2011

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A research may however be classified on a gamut between exploratory and confirmatory

research.

This research can be described as both exploratory and confirmatory but largely exploratory.

It explores into the performance of REITs and the challenges of adopting REIT structure,

partially confirming that there may be challenges since there is only one REIT in the country.

Any research can be classified as quantitative, qualitative or mixed method.

Qualitative Research Approach

Qualitative research entails an in-depth enquiry into human behaviour and the reasons that

govern such behavior. The qualitative method investigates the why and how of decision

making, not just what, where, when. The qualitative research paradigm has also been

described as a constructivist, naturalistic, interpretative, post-positivist or post-modern

perspective approach to research (Lincoln & Guba, 1985)

Creswell (2003) described it as an enquiry process of comprehending a social or human

problem based on building a complex holistic picture formed with words, reporting detailed

views of informants and conduced in a natural setting. In qualitative research approach;

theory and hypothesis are therefore not established prior to the research. The research

questions may change and be refined as the enquirer learns what question to ask and to

whom.

Quantitative Research Approach

Quantitative research refers to the systematic and empirical investigation of social problems

through the use of statistical, mathematical or computational techniques. The quantitative

research paradigm is also known as the traditional, positivist or empiricist research paradigm

(Creswell 2003). This method uses numerals and empirical data to describe trends,

behaviour or opinions of a population by studying a sample of that population.

Creswell (2003 and 1994) identifies some distinct characteristics of qualitative approach as

follows;

� Truthfulness or reality exists in the world and can be objectively and quantitatively

measured,

� The researcher should remain independent of that being researched to ensure an

objective assessment of the situation,

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� A deductive form of reasoning or logic is adopted wherein theories and hypothesis are

tested in cause-and-effect order. Concepts, variables and hypothesis are chosen prior to

commencement of the study and remain fixed all through.

Mixed Research

The mixed methods approach is also referred to as the integrating, synthesis, or multi-

methodology approach. This is because to a mixture of the quantitative and qualitative

research methods in one (Tashakkori and Teddlie 1998). This methodology is appropriate in

research works where it is possible to collect both quantitative and qualitative data, deeper

and more appropriate understanding of the phenomenon being researched (Creswell, 2003).

It is considered as a research design and method of inquiry that dictates the direction of the

collection and data analysis whereby the collection and analysis of data has a mix of

quantitative and qualitative research processes (Creswell and Plano Clark 2007).

The mixed method of research is the approach adopted in this work. In answering the 3

research questions, different qualitative and quantitative methods will be adopted as shown

in the table below;

Note that; Q= Questionnaire, S=Semi-structured interview, L= Literature Review, D=Data

Analysis

Research

Question

L Q S D Description

1 Are there

challenges in

adopting REIT

Structure in

financing Real

Estate in

Nigeria?

� � � �

� L- Detailed literature review of Real estate

finance and REITs in Nigeria

� Q- Questionnaires to provide information and

statistics for analysis

� S- Questions asked during semi-structured

interviews will provide broader views to

challenges and issues with REITs in Nigeria

� D- Data analysis of findings

2 How have REITs

performed in

Nigeria?

� � � �

� L- Detailed literature review on the

performance and issues of the only existing

and prospective REITs in Nigeria

� Q- Questionnaires to provide information and

A. B Odunsi 2011

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statistics for analysis

� S- Questions asked during semi-structured

interviews will provide broader views

� D- Data analysis of findings

3 How have REITs

in other

emerging

markets

performed?

�

�

� L- Detailed literature review on the framework,

structure and performance of ‘benchmark’

REITs in 2 emerging economies, namely;

South Africa and Turkey

� D- Data analysis of findings

Exhibit 3.1

Research Design

Research designs are procedures for collecting, analyzing, interpreting and reporting data in

a research work. It is important to carefully select the research design to be adopted

because it steers the entire process and determines the reasoning pattern for interpretation

of findings (Creswell and Plano Clark 2007).

Selective Sample Survey

As with most research endeavours, the population size of this research is too large and

practically impossible to be tested or assessed. This is due to various factors including

limitations in cost, time and manpower.

The population size is not only large but it is also quite daunting to determine its size in

precise terms, as the question of ‘who can adopt REIT structure?’ is posed. For the purpose

of this research, it is assumed that Mortgage banks, Venture Capitalists and Property

development and Investment companies in Nigeria make up the entire population. This is

because these are the according to the laws these are the sort of companies that may

ordinarily take up the REIT structure. Commercial banks are not included as the Central

Bank of Nigeria’s regulations prevents banks from taking large equity positions in real estate

investment which on the converse is the requirement to set up a REIT according to the ISA

2007.

As such a random sampling technique is adopted. A blend of mortgage banks, venture

capitalists and property development and investment companies are examined.

Questionnaires were sent to highest-level decision-makers in these companies and their

responses aided in answering research questions 1 and 2. Prior to administering

questionnaires, structured interviews were carried out with a few of these professionals and

A. B Odunsi 2011

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these gave valuable insight into industry perceptions and these were then use to generate

content for the questionnaires.

Performance Analysis

There are several measures available under the purview of corporate finance in measuring

the performance of companies or businesses. With available information on projections and

actual financials; variances, earnings per share, net asset value and liquidity ratios will be

calculated.

VAR and VEC Models

A Vector Auto-regression Models (VAR) describes the evolution of a set of variables over the

sample period as a linear function of only their past evolution. A VAR has more than one

dependent variable and can be considered a kind of hybrid between the uni-variate time

series models and the simultaneous–equation models (Brooks, 2010).

A vector error correction model adds error correction features to a multi-factor model such as

a vector auto regression model. This is done by creating a dynamical system where the

characteristics are deviation of the current state from its long-run relationship will be fed into

its short-run dynamics.

All multi-variable estimation problems require the researcher to address the identification

problem. With other regresion models, this required solving a sophisticated linear algebra

problem. The difficulty of this goes up geometrically with the size of the model in question.

VAR’s still require that the identification issue be addressed, but in a form that is much

easier to tackle.

Limitations of the Study

1. Due to time constraints, a small sample size of 20 real estate finance and mortgage

institutions as well as real estate investment companies were administered

questionnaires.

2. The financial statements for the only REIT in Nigeria- Union Homes Hybrid REIT were

not available; as such the necessary performance analysis could not be carried out.

3. Only two comparable countries (Turkey and South Africa) were assessed. This was due

largely to the lack of availability of information on other emerging economies that were

under consideration.

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CHAPTER FOUR: DATA ANALYSIS

Selective Sample Survey

The survey was sent out electronically to over 40 participants who are professionals in real

estate and real estate finance fields. However, within the time-frame available, 20 un-biased

responses were collected and analyzed. In comparison to the entire potential population,

this may be quite little, however, the selective sample approach that was adopted allowed for

a proper representation of the different classes of responsdents relative to the population. As

such majority of the respondents were property development companies (70%) and the

lower limit were commercial banks (5%). A consideration is that there are just 25 commercial

banks in nigeria and over 800 property deleopment companies in Nigeria (Pison Housing

Company, 2008).

Type of companies surveyed

Commercial Bank, 5%

Mortgage Bank, 20%

Venture Capital, 5%

Property Devt. /Inv. Company, 70%

Exhibit 4.1

The respondent target were decision makers in companies that have the business inclination

and structure to adopt REITs status. For the pupose of this research, these were assummed

to be Property development/invesment companies, mortgage banks, commercial banks and

venture capital firms. 50% of respondents were the Heads of their businesses while 35%

were also in top management.

Cadre of Respondents

MD/CEO 50%

Senior Management/Partner 35%

Middle Management 10%

Other 5% Exhibit 4.2

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Sources of Finance

The respondents provided information on how their companies generate funding for its real

estate developments, mortgages or both. 30% of respondents only use one source of

funding, 15% use two sources while 60% use three or more. In all 78% of the respondents

use debt, 44% use directors equity, 39% adopt joint ventures, 28% use funds from private

equity. However, non of the respondents use the REIT structure to raise capital for its

business.

Respondents’ Sources of Finance

0% 20% 40% 60% 80% 100%

Directors Equity

Other Shareholders Equity

Debt/Loans

Public Listing

Joint Venture

Private Equity

Other businesses

REIT

Sources of finance

Exhibit 4.3

The REIT Structure

While non of the respondents is currently using the REIT structure, 58% of respondents are

considering using it as a means of raising capital for real estate. 42% of the 19 respondents

to this question are not considering REITs.

Currently considering adopting REIT structure?

Yes 58%

No 42% Exhibit 4.4

Of the respondents that are currently considering adopting REITs, 80% are encountering

challenges adopting the REIT structure. 50% of the mortgage banks represented, 100% of

A. B Odunsi 2011

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commercial banks and 64% of property development/investment companies are having

challenges adopting REIT structure. None of the Venture Capital firms surveyed are

considering REITs.

Encountering challenges

Yes 80%

No 20% Exhibit 4.5

From this simple survey, the major challenge that firms are facing with respect to adopting

the REIT structure is the poor capital market condition. However, limited expertise, high

conversion costs, limited knowledge of REITs Nigeria and stringent conversion requirements

are major concerns to professionals.

Challenges encountered in adopting REIT Structure in Nigeria

0% 20% 40% 60% 80%

Limited Expertise

Poor Investor confidence

Limited knowledge of REITs

High conversion costs

Stringent conversion requirements

Timing

Poor capital market conditions

Legal framework issues

Challenges Encountered

Exhibit 4.6

75% of respondents claim that their companies will be adopting the REIT structure in future

while 25% are undecided and only 5% don’t think the will become a REIT. These figures

show a high level of appreciation for REITs and a potential sprout once all challenges are

sorted out, especially in the event of more favourable capital market conditions.

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Considering adopting REITs in future?

Yes 70%

No 5%

Undecided 25% Exhibit 4.7

Performance Analysis of Union Homes Hybrid REIT

While the forecast figures of the Union Homes REIT are readily available, it was impossible

within the period of research to secure the financial statements for Union Homes Hybrid

REIT. This created a major limitation to this study. However, it is clear that the REIT must

have faced several problems as it was scheduled to be listed by 16th December, 2008 but

only got listed 5th July, 2010. Also, at the time of listing, only 250,019,781 units were listed as

against the 970,873,787 Units offered for subscription. This represents only 26% of the units

allotted and it includes the mandatory 10% subscription of the total fund size by the REITs

sponsor as stipulated by SEC. These poor figures give indicators into the potential

performance of the REIT considering that all the capital expected to be raised was not

secured.

3-Year Financial Projects of Union Homes Hybrid REIT

YEAR I YEAR II YEAR III

N '000 N '000 N '000

GROSS INCOME 3,324,178 6,345,579 6,770,149

LESS EXPENSES 878,550 1,036,365 1,044,182

NET INCOME 2,445,628 5,309,214 5,725,967

PROVISION FOR TAX 782,601 1, 698,948 1,832,310

DISTRIBUTION @ 90% 1,496,724 3,249,239 3,504,291

UNDISTRIBUTED INCOME 166,303 361,027 389,366

EARNINGS PER UNIT (EPU) 171K 372K 401K

DISTRIBUTIONS PER UNIT (DPU) 154K 335K 361K

Exhibit 4.8

At the time of offer, the financial projects of Union Homes Hybrid REIT were very

commendable and promising; however the prevailing situation may have prevented the

realisation of these aims.

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Financial Summary of Union Homes Savings and Loans Plc

2009 N'M 2008 N'M % CHANGE

GROSS EARNING 4,402.00

6,510.00 -32.28%

PROFIT BEFORE TAX -1,315.00 -1,916.00 -31.37%

TAXATION -353.94 - 329.36 7.46%

PROFIT/LOSS AFTER TAX -1,669.00 - 2,245.00 -25.66%

BALANCE SHEET INFORMATION

FIXED ASSETS 3,869.00

2,753.00 40.54%

STOCK 73.85 5,273.00 -98.60%

TRADE DEBTORS 17.15 16.07 6.74%

CASH AND BANK BALANCE 185.95 325.53 -42.88%

OTHER DEBIT BALANCES 26,948.00 60,637.00 -55.56%

TRADE CREDITORS 37,168.00 53,223.00 -30.17%

OTHER CREDIT BALANCES 4,954.00 24,184.00 -79.52%

NET ASSETS 5,708.00 7,215.00 -20.89%

Exhibit 4.9

As earlier stated, the actual financial statements of the REIT were not secured, however the

performance of Union Homes Savings and Loans Plc, the fund manager and sponsor were

secured. This is shown in Exhibit 4.9 and clearly shows a situation of underperformance by

the parent company to the REIT.

Vector Auto-Regression Model

E-views statistical and econometrics software was utilized in producing model estimations ,

descriptive statistics and other econometric tests on rleveant data for Nigeria, South Africa

and Turkey. Due to data availability limitations, VAR analysis was carried out only on

Turkish and South African REIT returns.

Data Used

Time series data was obtained from bloomberg on two macro variables (Inflation- CPI and

Interest rates) of Nigeria, South Africa and Turkey. GPR 250 REIT indices for South Africa

and Turkey were also obtained which are representative of REIT prices in the countries.

REIT Index for Nigeria was not available.

A. B Odunsi 2011

39

Definition of variables and their data sources

Source Period Frequency Observations

Nigeria CPI IMF 2005:2011Q2 Monthly 78

S/Africa CPI IMF 2000:2011Q2 Monthly 134

Turkey CPI IMF 2006:2011Q2 Monthly 66

Nigeria Interest rate IMF 2005:2011Q2 Monthly 78

S/Africa Interest rate IMF 2000:2011Q2 Monthly 134

Turkey Interest rate IMF 2006:2011Q2 Monthly 66

Turkey Unemployment IMF 2006:2011Q1 Monthly 64

S/Africa REIT Index GPR 2005:2011Q2 Monthly 134

Turkey REIT Index GPR 2006:2011Q2 Monthly 66 Exhibit 4.10

Similarities and Correlation

Nigeria, South Africa and Turkey are all emerging economies with B, BBB and B sovereign

ratings respectively. (EIU, 2011). Inflation rates in all three countries are highly positively

correlated (Average, 0.96) while interest rates are highly correlated between South Africa

and Turkey (0.807) but low between Nigeria and South Africa (0.342).

Inflation: Nigeria, South Africa and Turkey (2006:2011Q2)

Exhibit 4.11

Inflation Rates: Correlation

Nigeria South Africa Turkey

Nigeria 1 0.960239977 0.975337085

South Africa 0.960239977 1 0.987826171

Turkey 0.975337085 0.987826171 1 Exhibit 4.12

100

110

120

130

140

150

160

170

180

I II III IV I II III IV I II III IV I II III IV I II III IV I II III

2006 2007 2008 2009 2010 2011

NIG_CPI SA_CPI TURK_CPI

A. B Odunsi 2011

40

Interest Rates: Nigeria, South Africa and Turkey (2006:2011Q2)

Exhibit 4.13

Interest Rates: Correlation

Nigeria South Africa Turkey

Nigeria 1 0.342652 0.632902

South Africa 0.342652 1 0.807078

Turkey 0.632902 0.807078 1 Exhibit 4.14

REIT Index: South Africa and Turkey (2006:2011Q2)

Exhibit 4.15

4

8

12

16

20

24

28

I II III IV I II III IV I II III IV I II III IV I II III IV I II III

2006 2007 2008 2009 2010 2011

NIG_INT_RTSA_INT_RTTURK_INT_RT

0

100

200

300

400

500

600

700

800

900

I II III IV I II III IV I II III IV I II III IV I II III IV I II III

2006 2007 2008 2009 2010 2011

SA_REIT_IND TURK_REIT_IND

A. B Odunsi 2011

41

REIT Index: Correlation

South Africa Turkey

South Africa 1 0.330194678

Turkey 0.330194678 1 Exhibit 4.16

Descriptive Statistics

The REIT returns for South Africa and Turkey were compared utilizing some descriptive

statistics to evaluate the returns distribution and their characteristics. REIT returns in both

Turkey and South Africa have relatively low standard deviations which mean REIT returns

have a low variation or dispersion from the expected average. It has a high kurtosis which is

a measure of the "peakedness" of the probability distribution of a real valued random

variable, in this case REIT returns.

Probability Distribution of South Africa REIT Returns

Exhibit 4.17

0

4

8

12

16

20

24

-0.2 -0.1 0.0 0.1 0.2

Series: REIT_RETURNSSample 2000M03 2011M05Observations 134

Mean 0.015833Median 0.027094Maximum 0.229112Minimum -0.257320Std. Dev. 0.083241Skewness -0.755545Kurtosis 4.648141

Jarque-Bera 27.91533Probability 0.000001

A. B Odunsi 2011

42

Probability Distribution of Turkish REIT Returns

Exhibit 4.18

VAR Analysis: Co-integration Tests

In order to appropriately adopt a using a vector auto-regression model in estimating the

impacts of CPI and interest rates on REIT returns, a co-integration test must be done to

ensure the variables are not co-integrated (i.e. there is a long-run relationship between the

variables), otherwise a vector error correction model (VECM) may be more appropriate. In

doing this, the first difference of the REIT index, interest rate and CPI for both South Africa

and Turkey was estimated.

Co-integration Tests

Unrestricted Co-integration Rank Test (Trace)

Hypothesized Trace 0.05

No. of CE(s) Eigenvalue Statistic Critical Value Probability

None 0.093354 18.12176 29.79707 0.5571

At most 1 0.038521 5.185285 15.49471 0.7888

At most 2 7.65E-08 1.01E-05 3.841466 0.9992

Unrestricted Co-integration Rank Test (Maximum Eigenvalue)

Hypothesized Max-Eigen 0.05

No. of CE(s) Eigenvalue Statistic Critical Value Probability

None 0.093354 12.93648 21.13162 0.4581

At most 1 0.038521 5.185274 14.2646 0.7183

At most 2 7.65E-08 1.01E-05 3.841466 0.9992 Exhibit 4.19

0

2

4

6

8

10

12

14

-0.6 -0.4 -0.2 0.0 0.2

Series: REIT_DESCRIPTIVE_STATSSample 2005M12 2011M07Observations 67

Mean -0.004408Median 0.014006Maximum 0.310199Minimum -0.608993Std. Dev. 0.153880Skewness -1.246772Kurtosis 6.038080

Jarque-Bera 43.12480Probability 0.000000

A. B Odunsi 2011

43

In both cases, at 0.05 significance level the Trace and Maximum eigenvalue tests show that

there is no co-integration as shown in the results above. As such the VAR approach is

adopted to examine the relationship between REITs, interest rates and inflation (CPI) in both

South Africa and Turkey.

VAR Analysis: Lag Length Selection

A critical element in the specification of VAR models is the determination of the lag length of

the VAR. Braun and Mittnik (1993) showed that estimates of a VAR whose lag length differs

from the true lag length are inconsistent as are the impulse response functions and variance

decompositions derived from the estimated VAR. Lütkepohl (1993) also indicates that over-

fitting causes an increase in the mean-square forecast errors of the VAR and under-fitting

the lag length often generates auto-correlated errors. Hafer and Sheehan (1989) find that the

accuracy of forecasts from VAR models varies substantially for alternative lag lengths.

Researchers and statistics have often selected an appropriate lag by using an explicit

statistical criterion such as the Akaike Information Criterion (AIC) or Schwarz Information

Criterion (SIC). In this research work, the AIC was adopted and the optimal lag length

estimated was 4 and 1 for South Africa and Turkey respectively. See Appendix ** for

estimates.

VAR Analysis: Granger Causality Tests

Rather than grilling through the VAR results obtained, the much more direct Granger

causality test was used to investigate the influence of both interest rates and inflation on

REIT prices in both countries. Granger causality tests are used to test if changes in a

variable will impact on changes in other variables.

Estimations for South Africa show that neither changes in interest rate nor inflation influence

changes in REIT prices. On the other hand, REITs in Turkey are sensitive to interest rate

risks, but not inflation.

Impulse Response Functions

Impulse – Response functions estimate how typical shocks will affect a variable through time.

As such, impact of unexpected changes to interest rates and inflation on REIT prices was

investigated. For South Africa, unexpected change in interest rates would cause REIT prices

to rise temporarily (for about 6 months) and then over time (7-24 months), it has a negative

impact on prices. In Turkey, the effect is persistently negative on REIT prices. See Exhibit

4.20 below

A. B Odunsi 2011

44

South African REIT Impulse Response

Exhibit 4.20

-.020

-.015

-.010

-.005

.000

.005

.010

2 4 6 8 10 12 14 16 18 20 22 24

Response of LOG_SA_REIT_INDEX to LOG_INTEREST_RATE

-.020

-.015

-.010

-.005

.000

.005

.010

2 4 6 8 10 12 14 16 18 20 22 24

Response of LOG_SA_REIT_INDEX to LOG_CPI

A. B Odunsi 2011

45

Turkish REIT Impulse Response

Exhibit 4.21

VAR Decompositions

The variance decomposition methodology show which shocks are most important in

explaining a variable through time. This tool was adopted in examining what proportion of

unexpected changes in REIT prices is caused by shocks to the interest rates and inflation. In

South Africa, over 12 months, 99% of unexpected changes are caused by shocks to REITs.

In Turkey, the story is different; 83% is caused by its own shocks while 15% is caused by

interest rate shocks.

-.05

-.04

-.03

-.02

-.01

.00

2 4 6 8 10 12 14 16 18 20 22 24

Response of LOG_TURKEY_REIT_INDEX to LOG_INTEREST_RATE

-.05

-.04

-.03

-.02

-.01

.00

2 4 6 8 10 12 14 16 18 20 22 24

Response of LOG_TURKEY_REIT_INDEX to LOG_CPI

A. B Odunsi 2011

46

South Africa: VAR Decomposition

Period S.E. LOG_SA_REIT_INDEX LOG_INT_RATE LOG_CPI

1 0.085201 100 0 0

2 0.126704 99.95958 0.000245 0.040178

3 0.151801 99.82776 0.061973 0.110269

4 0.170621 99.81227 0.054025 0.133704

5 0.185974 99.82193 0.046073 0.131996

6 0.198623 99.83877 0.041076 0.120151

7 0.209211 99.8347 0.055978 0.109325

8 0.21818 99.80383 0.095644 0.100525

9 0.225916 99.73023 0.175551 0.094216

10 0.232727 99.60353 0.306515 0.089957

11 0.238789 99.42598 0.486519 0.087504

12 0.244248 99.19445 0.71907 0.086479 Exhibit 4.22

Turkey: VAR Decomposition

Period S.E. LOG_TURK_REIT_INDEX LOG_INT_RATE LOG_CPI

1 0.150629 100 0 0

2 0.197829 99.552 0.405005 0.042994

3 0.226585 98.59753 1.270388 0.13208

4 0.246253 97.24162 2.503508 0.254874

5 0.260629 95.59794 4.003199 0.398857

6 0.27165 93.77604 5.67131 0.552651

7 0.280418 91.87227 7.420909 0.706822

8 0.287594 89.96506 9.180728 0.854208

9 0.293595 88.11372 10.89641 0.989876

10 0.298692 86.35964 12.5295 1.110853

11 0.303068 84.729 14.05525 1.215751

12 0.306851 83.23578 15.45984 1.304376 Exhibit 4.23

Interpretation of Results

From estimations, REITs in South Africa show response to neither changes in interest rates

nor inflation. Assuming that inflation and interest rates are significant and sufficient proxies

for a countries macroeconomic situation, one may infer that South African REITs are solid

defensive stocks. Also, sudden changes in interest rates have positive short run effects on

REIT prices but grow adverse in the long run.

As for Turkish REITs, they showed sensitivity to interest rate risks but not to inflation while

unexpected changes in rates create negative effects on REIT prices. This is supported by

Erol and Tirtiroglu (2004) who showed with empirical results that Turkish REITs generally

provide a better hedge against both actual and expected inflation than do the other common

stocks listed on the Istanbul stock exchange.

A. B Odunsi 2011

47

The VAR decomposition showed that 83% of shocks are caused by shocks of the REITs

themselves while 15% is caused by interest rate shocks. Considering that both independent

variables need to be causative to infer a general macroeconomic influence, this cannot be

inferred. This situation may have more to do with the structure of Turkish REITs. For

instance, this may be due to a situation where Turkish REITs are heavily invested in

mortgage products. However this may not be so as Aydinoglu (2004) reports that a major

obstacle in Turkish real estate market is the lack of a mortgage system and long-term

financing for real estate.

A. B Odunsi 2011

48

CHAPTER FIVE: CONCLUSION

Summary

This research work has produced one of the premier and first level enquiries into REITs in

Nigeria. Considering that legislation has been passed supporting and detailing the structure

for the existence of Nigerian REITs since 2008, this investigation coming 3 years down the

line provides some valid queries on the level of acceptance this investment instrument has

received.

Real estate finance is well identified to be categorized as financing of land, construction

finance i.e. funding of the property built on the land, and thirdly, financing the occupation or

user of the property (Akaneme, 2011). However, this work reviews literature on real estate

finance based on the two major classes of finance, namely; debt and equity. As such

previous works and concepts of debt and equity types of real estate finance were examined

as well as their various sources in the subject country. This then culminated into a deeper

review into REITs, particularly on the structure and behaviour of REITs in Nigeria and two

other emerging economies; South Africa and Turkey.

A mixed research method was adopted, which means the exploration had both quantitative

and qualitative dimensions to it in order to attain a deeper and more appropriate

understanding of the phenomenon being researched (Creswell, 2003).

On the quantitative side; a selective sample survey was electronically conducted on firms

most likely to adopt or have adopted the REIT structure in financing their real estate,

mortgage or hybrid (a mix of both) transactions. These were identified within the Nigerian

context to be Mortgage banks, property development/investment companies and venture

capitalists. From an un-biased and qualified sample of 20, the following was determined:

Summary of Survey findings

All Respondents are Real estate/Mortgage Professionals

None of the Respondents have adopted REITs

Only 1 REIT exists in Nigeria

30% of respondents only use one source of funding, others mix

58% of Respondents are considering adopting REIT structure

80% considering REIT structure are having challenges adopting it

Poor capital conditions is the major challenge

Exhibit 5.1

Ranking of Challenges to adopting REIT structure in Nigeria

While the intention of the researcher was to carry out some performance analysis on the

only REIT in Nigeria- Union Homes Hybrid REIT, the financial forecasts of the REIT were

secured however the actual financials were not available as at the time of this undertaken.

This impaired a full performance measurement, however considering that only 26% of the

units offered for subscription were subscribed for and no more than 16% of this was by the

general public. Also the REIT has not been traded on the floor of the exchange since its

listing. These subtly hint at the possibility of underperformance by the REIT especially

considering that it only secured about a quarter of the capital projected to be raised.

Adopting a vector auto-regression model, the performance of REITs in two other

economies (South Africa and Turkey) were assessed using two macroeconomic variables as

proxies for economic conditions. SA REITs showed no response to neither changes in

interest rates or inflation, thereby generating a possible inference that So

are solid defensive stocks. On the other hand, Turkish REITs showed sensitivity to interest

rate risks but not to inflation. In the short run sudden changes in interest rates cause SA

REIT prices to rise temporarily but after about 6 mont

REIT prices. Interest rate shocks

further confirm the huge influence of interest rates on them

Finally, the VAR decomposition showed that majority shocks to

shocks of the REITs themselves in both Turkey and SA however in the case of Turkey 15%

of shocks are caused by interest rate shocks

need to be causative to infer a general macroeconomic

1st•Poor Capital market conditions

2nd•Limited Expertise

3rd•High conversion costs

4th•Limited knowledge of REITs

5th•Stingent conversion requirements

6th•Poor investor confidence

7th•Legal framework issues

8th•Timing

Ranking of Challenges to adopting REIT structure in Nigeria

Exhibit 5.2

the researcher was to carry out some performance analysis on the

Union Homes Hybrid REIT, the financial forecasts of the REIT were

secured however the actual financials were not available as at the time of this undertaken.

ed a full performance measurement, however considering that only 26% of the

units offered for subscription were subscribed for and no more than 16% of this was by the

l public. Also the REIT has not been traded on the floor of the exchange since its

listing. These subtly hint at the possibility of underperformance by the REIT especially

considering that it only secured about a quarter of the capital projected to be raised.

regression model, the performance of REITs in two other

economies (South Africa and Turkey) were assessed using two macroeconomic variables as

proxies for economic conditions. SA REITs showed no response to neither changes in

interest rates or inflation, thereby generating a possible inference that So

are solid defensive stocks. On the other hand, Turkish REITs showed sensitivity to interest

rate risks but not to inflation. In the short run sudden changes in interest rates cause SA

REIT prices to rise temporarily but after about 6 months it begins to have negative effects on

Interest rate shocks show a constant negative effect on Turkish REIT prices

further confirm the huge influence of interest rates on them.

Finally, the VAR decomposition showed that majority shocks to REIT prices are caused by

shocks of the REITs themselves in both Turkey and SA however in the case of Turkey 15%

of shocks are caused by interest rate shocks. Considering that both independent variables

need to be causative to infer a general macroeconomic influence, this cannot be inferred.

Poor Capital market conditions

Limited Expertise

High conversion costs

Limited knowledge of REITs

Stingent conversion requirements

Poor investor confidence

Legal framework issues

Timing

A. B Odunsi 2011

49

Ranking of Challenges to adopting REIT structure in Nigeria

the researcher was to carry out some performance analysis on the

Union Homes Hybrid REIT, the financial forecasts of the REIT were

secured however the actual financials were not available as at the time of this undertaken.

ed a full performance measurement, however considering that only 26% of the

units offered for subscription were subscribed for and no more than 16% of this was by the

l public. Also the REIT has not been traded on the floor of the exchange since its

listing. These subtly hint at the possibility of underperformance by the REIT especially

considering that it only secured about a quarter of the capital projected to be raised.

regression model, the performance of REITs in two other emerging

economies (South Africa and Turkey) were assessed using two macroeconomic variables as

proxies for economic conditions. SA REITs showed no response to neither changes in

interest rates or inflation, thereby generating a possible inference that South African REITs

are solid defensive stocks. On the other hand, Turkish REITs showed sensitivity to interest

rate risks but not to inflation. In the short run sudden changes in interest rates cause SA

hs it begins to have negative effects on

on Turkish REIT prices

REIT prices are caused by

shocks of the REITs themselves in both Turkey and SA however in the case of Turkey 15%

. Considering that both independent variables

influence, this cannot be inferred.

A. B Odunsi 2011

50

Summary of VAR Analysis findings

Nigeria, South Africa (SA) and Turkey are emerging economies

Inflation rates in all 3 countries are highly positively correlated

Interest rates are highly correlated between SA and Turkey but low

between Nigeria and SA

Turkish and South African REITs have relatively low standard deviations

SA REITs prices are neither influenced by interest rates nor inflation

Turkish REITs are sensitive to interest rate risks but not inflation.

Interest rate shocks cause SA REIT prices to rise temporarily but is

adverse over time

Interest rate shocks are persistently negative on Turkish REIT prices.

Exhibit 5.3

Conclusion and Recommendations

This research endeavour has been able to identify that a lot of Nigeria real estate and

mortgage professionals are considering adopting the REIT structure in financing their

businesses, as at present majority of them adopt more than one source of funding

depending on their different corporate finance outlooks. However, only one mortgage bank

has adopted this structure due to challenges that are being faced.

According to the research findings, the major challenge is the poor condition of the Nigerian

capital market. Also, limited expertise on REIT structuring and the high conversion costs are

some of the fears of professionals. The goes to show that real estate and mortgage players

being rationale and risk averse as an average investor want to ensure the structure, market

and expertise level is tested before they launch out.

While the first challenge may be quite daunting for regulators such as the Securities and

Exchange Commission (SEC) and the Nigerian Stock Exchange (NSE) to ameliorate, they

have major roles to play in improving expertise on REITs as well as reduction in conversion

costs. In the UK, the government is proposing scraping the 2% conversion cost on total

asset value amongst other efforts aimed at encouraging the creation of REITs (CBRE, 2011).

Similar measures need to be taken by Nigerian regulators to incubate the success of REITs

in the country.

As seen from the VAR decomposition of South African and Turkish REITs, majority of the

shocks to REITs are caused by the REITs themselves and not macroeconomic factors or

indicators. This gives an insight into the potential behaviour of Nigerian REITs being highly

A. B Odunsi 2011

51

correlated with these economies. While this is not an assertive position, it forms a basis of

investigations on N-REITs when they begin to be traded in huge volumes in the wake of

more favourable market conditions.

Areas for further Study

In further assessing the performance of REITs in other emerging economies, the influences

and impulse response functions of REITs to the All-share-Index may be determined. Such

estimation may potentially show presence of co-integration as it is expected for REITs to

have long run relationships with the all share index. However, in such a case a vector error

correction model may be utilized.

It is also the believe of the researcher that further studies may have access to data on REITs

in Nigeria and this will open up a wide spectrum of research that may be carried out ranging

from the diversification benefits of Nigerian REITs in a portfolio to assessments of their

performance in aiding to reduce the real estate finance deficit in the country, amongst others.

A. B Odunsi 2011

52

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A. B Odunsi 2011

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APPENDIX

Appendix 1- Research Survey

1. What type of company are you?

� Commercial Bank � Mortgage Bank � Property Development/Investment Company

� Other ____________

2. How do you fund your real estate developments/mortgages?

� Directors Equity � Debt/Loans � Public Listing � Joint Venture � Private Equity

� Other businesses � REIT � Other _______________________________________

3. Are you currently considering adopting REIT structure in financing your real estate

developments/mortgages?

� Yes � No

4. If Yes to Question 3, are there any challenges you are encountering in adopting REIT structure?

� Yes � No

5. If Yes to Question 4, what are the challenges you are encountering in adopting REIT structure in

financing your real estate developments?

� Limited Expertise � Poor Investor confidence � Limited knowledge of REITs

� High conversion costs � Stringent conversion requirements � Timing

� Poor Capital Market conditions � Other _________________

_____________________________________________________________________________

6. Do you see your company adopting REIT structure in future?

� Yes � No

7. What is your position in your company ______________________

8. What is the name of you Company ___________________________________

A. B Odunsi 2011

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Appendix 2- VAR Optimal Lag Estimates

South Africa: VAR Lag Order Selection

Lag LogL LR FPE AIC SC HQ

0 15.83362 NA 0.000164 -0.202104 -0.134919 -0.174808

1 856.542 1628.459 3.36E-10 -13.29987 -13.03113* -13.19069

2 876.3111 37.359 2.84E-10 -13.46947 -12.99917 -13.27839*

3 888.5234 22.50128 2.70E-10 -13.52005 -12.8482 -13.24709

4 898.9588

18.73445* 2.64e-10* -13.54266* -12.66925 -13.1878

5 906.116 12.51095 2.73E-10 -13.51364 -12.43867 -13.07689

6 914.4479 14.17079 2.76E-10 -13.50312 -12.22659 -12.98448

7 918.857 7.290692 2.98E-10 -13.43082 -11.95274 -12.83029

8 925.9675 11.42157 3.09E-10 -13.40106 -11.72142 -12.71865

Turkey: VAR Lag Order Selection

Lag LogL LR FPE AIC SC HQ

0 74.03236 NA 1.95E-05 -2.32893 -2.225116 -2.288244

1 344.5014

505.4667* 3.70e-09* -10.90168* -10.48643* -10.73894*

2 346.7728 4.021543 4.63E-09 -10.68108 -9.954381 -10.39628

3 349.5636 4.666621 5.70E-09 -10.4775 -9.439361 -10.07064

4 352.3315 4.356004 7.07E-09 -10.27316 -8.923589 -9.744253

5 358.8879 9.673298 7.80E-09 -10.19304 -8.532029 -9.542077

6 363.8159 6.786178 9.16E-09 -10.05954 -8.087082 -9.286514

* indicates lag order selected by the criterion

LR: sequential modified LR test statistic (each test at 5% level)

FPE: Final prediction error

AIC: Akaike information criterion

SC: Schwarz information criterion

HQ: Hannan-Quinn information criterion

A. B Odunsi 2011

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Appendix 3- VAR Estimates

South Africa Vector Auto-regression Estimates

LOG_SA_REIT_INDEX LOG_INTEREST_RATE LOG_CPI

LOG_SA_REIT_INDEX(-1) 1.0978 -0.038254 -2.69E-05

-0.09265 -0.0416 -0.00462

[ 11.8486] [-0.91951] [-0.00582]

LOG_SA_REIT_INDEX(-2) -0.234291 -0.034594 -0.00557

-0.13767 -0.06182 -0.00686

[-1.70186] [-0.55962] [-0.81170]

LOG_SA_REIT_INDEX(-3) 0.101437 0.012902 -0.005304

-0.13864 -0.06225 -0.00691

[ 0.73167] [ 0.20725] [-0.76762]

LOG_SA_REIT_INDEX(-4) -0.019091 0.052506 0.010094

-0.09274 -0.04164 -0.00462

[-0.20587] [ 1.26094] [ 2.18373]

LOG_INTEREST_RATE(-1) 0.009475 0.851543 0.031356

-0.1982 -0.08899 -0.00988

[ 0.04781] [ 9.56846] [ 3.17409]

LOG_INTEREST_RATE(-2) 0.124951 0.409826 -0.030189

-0.26498 -0.11898 -0.01321

[ 0.47155] [ 3.44448] [-2.28586]

LOG_INTEREST_RATE(-3) -0.188713 0.002504 0.007088

-0.27346 -0.12279 -0.01363

[-0.69010] [ 0.02039] [ 0.52004]

LOG_INTEREST_RATE(-4) 0.008799 -0.328842 -0.007119

-0.20325 -0.09126 -0.01013

[ 0.04329] [-3.60329] [-0.70276]

LOG_CPI(-1) -0.613913 0.528189 1.232283

-1.86484 -0.83736 -0.09295

[-0.32920] [ 0.63078] [ 13.2578]

LOG_CPI(-2) 0.372925 -0.062574 -0.195477

-2.95854 -1.32845 -0.14746

[ 0.12605] [-0.04710] [-1.32562]

LOG_CPI(-3) 0.409852 0.566969 0.010174

-2.86636 -1.28706 -0.14287

[ 0.14299] [ 0.44051] [ 0.07121]

LOG_CPI(-4) -0.011465 -1.070007 -0.042259

-1.7924 -0.80483 -0.08934

[-0.00640] [-1.32949] [-0.47303]

A. B Odunsi 2011

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C -0.300701 0.349871 -0.016094

-0.32992 -0.14814 -0.01644

[-0.91142] [ 2.36171] [-0.97870]

R-squared 0.987553 0.980441 0.999503

Adj. R-squared 0.986287 0.978452 0.999453

Sum sq. Resids 0.856579 0.172704 0.002128

S.E. equation 0.085201 0.038257 0.004247

F-statistic 780.1695 492.9315 19780.5

Log likelihood 143.5844 248.474 536.4395

Akaike AIC -1.993656 -3.595023 -7.991442

Schwarz SC -1.708331 -3.309698 -7.706117

Mean dependent 5.766042 2.194271 4.666266

S.D. dependent 0.727572 0.260622 0.181504

Determinant resid covariance (dof adj.) 1.81E-10

Determinant resid covariance 1.32E-10

Log likelihood 932.3976

Akaike information criterion -13.63966

Schwarz criterion -12.78368

A. B Odunsi 2011

59

Turkey Vector Auto-regression Estimates

LOG_TURK_REIT_INDEX LOG_INT_RATE LOG_CPI

LOG_TURK_REIT_INDEX(-1) 0.827941 0.003739 0.001673

-0.06779 -0.0209 -0.00373

[ 12.2139] [ 0.17892] [ 0.44833]

LOG_INTEREST_RATE(-1) -0.270963 0.939057 -0.00096

-0.15169 -0.04677 -0.00835

[-1.78624] [ 20.0777] [-0.11500]

LOG_CPI(-1) -0.508776 -0.147677 0.991411

-0.30946 -0.09541 -0.01703

[-1.64408] [-1.54775] [ 58.2115]

C 4.036537 0.882683 0.044201

-2.12176 -0.65419 -0.11677

[ 1.90245] [ 1.34928] [ 0.37853]

R-squared 0.833601 0.966448 0.995941

Adj. R-squared 0.825549 0.964824 0.995744

Sum sq. Resids 1.406715 0.133728 0.004261

S.E. equation 0.150629 0.046442 0.00829

F-statistic 103.5326 595.2911 5070.57

Log likelihood 33.34717 111.003 224.7326

Akaike AIC -0.889308 -3.242514 -6.688866

Schwarz SC -0.756602 -3.109808 -6.556159

Mean dependent 4.263206 3.026418 4.890562

S.D. dependent 0.360637 0.247625 0.127076

Determinant resid covariance (dof adj.) 3.11E-09

Determinant resid covariance 2.58E-09

Log likelihood 371.6638

Akaike information criterion -10.8989

Schwarz criterion -10.50078

A. B Odunsi 2011

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Appendix 4- Granger Estimates Causality/Block Exogeneity Wald Tests

Dependent variable: LOG_TURKEY_REIT_INDEX

Excluded Chi-sq df Prob.

LOG_INTEREST_RATE 3.190671 1 0.0741

LOG_CPI 2.70301 1 0.1002

All 3.23313 2 0.1986

Dependent variable: LOG_INTEREST_RATE

Excluded Chi-sq df Prob.

LOG_TURKEY_REIT_INDEX 0.032011 1 0.858

LOG_CPI 2.39554 1 0.1217

All 4.8266 2 0.0895

Dependent variable: LOG_CPI

Excluded Chi-sq df Prob.

LOG_TURKEY_REIT_INDEX 0.201003 1 0.6539

LOG_INTEREST_RATE 0.013225 1 0.9084

All 0.411564 2 0.814

Dependent variable: LOG_SA_REIT_INDEX

Excluded Chi-sq df Prob.

LOG_INTEREST_RATE 1.826506 4 0.7676

LOG_CPI 3.024519 4 0.5537

All 3.97524 8 0.8594

Dependent variable: LOG_INTEREST_RATE

Excluded Chi-sq df Prob.

LOG_SA_REIT_INDEX 6.492967 4 0.1652

LOG_CPI 3.301347 4 0.5087

All 14.77015 8 0.0638

Dependent variable: LOG_CPI

Excluded Chi-sq df Prob.

LOG_SA_REIT_INDEX 7.572502 4 0.1086

LOG_INTEREST_RATE 13.32578 4 0.0098

All 22.86155 8 0.0035