Real estate investment companies: a necessary vehicle for African Real Estate

The UN has said Africa will experience 16% growth in its urban population by 2050, the highest growth rate in the world.

A Real Estate Investment Trust (REIT) is a company that owns, operates or finances income-generating real estate in property segments such as residential buildings, hotels, warehouses, etc. Like mutual funds, RRITs pool investors’ money and trade on the stock exchange, making them a highly liquid instrument, unlike physical assets. Investors benefit from regular income from the dividends of these funds, without having to buy, manage or finance real estate.

There are three main types of ERTs:

1. Equity RSP: These funds own and manage income-generating real estate. For these REITS, income is generated mainly by renting and not by reselling properties.
2. Mortgage RRITs: These structures lend money to property owners through mortgage-backed loans or securities. This type of fund generates profits through the net interest margin, which is the difference between the interest earned on mortgages and the cost of financing those loans.
3. Hybrid REITS: These hybrid companies use a combination of equity and mortgage investment strategies.

ITPs can also be classified based on how their shares are bought and sold and based on the underlying property.

Typical structure of an RSP

The importance of ERIts in mobilizing capital in Africa for real estate.

According to the United Nations, Africa and Asia will have the most urban inhabitants by 2030. The UN has said Africa will experience 16% growth in its urban population by 2050, the highest growth rate in the world.

This wave of rapid urbanization has already swept through many African cities. As young people’s purchasing power and disposable income increase, they migrate to cities to find jobs, which has boosted demand for housing, infrastructure, shops and commercial spaces. Due to the population explosion of African cities, the demand for high-quality commercial, retail and residential real estate units is on the rise. According to BGL Research, Nigeria alone needs about 16 million housing units to accommodate its growing population.

However, most real estate investment in Africa comes from public borrowing or domestic savings, not from international or domestic capital markets, as is the case in developed countries. As a result, African real estate development is short of capital.1

ERTs can be used by policymakers, real estate developers and real estate investors, to help solve the financing constraints of Africa’s rapidly growing real estate market.

What does it take to launch UCITS in West Africa?

Over the 2013–2018 period, Africa-focused real estate funds raised just $2 billion from investors compared to $11.9 billion and $4.2 billion raised by private equity and infrastructure funds. The main markets for real estate funds in Africa are South Africa, Kenya and Ghana.2

Although real estate investment funds are growing, countries like Nigeria, Ghana and Rwanda still lack transparency, while Uganda, Tanzania, Ethiopia, Côte d’Ivoire and Senegal are still quite opaque. In addition, in West Africa, a regulatory framework allowing for the distribution of dividends tax-free is needed. Once REFORETs legislation is drafted with greater clarity on tax structures and a better knowledge of these funds and the real estate market as an asset class by investors, these financial structures will have the potential to expand into West African markets. Diversification in terms of location and type of ownership could also help launch and adopt ERTs faster in West Africa.

ERTs in the South African, Kenyan and Moroccan markets.

As of December 2019, ERTs were used by approximately 35 countries worldwide, including Nigeria, Ghana, Morocco, Kenya and South Africa.3

In South Africa, RSP legislation has helped to establish a RSP market structure that has attracted foreign investment. EWTs have grown significantly as an asset class in the country, accounting for a significant share of the Johannesburg Stock Exchange (JSE), and offering the next big opportunity for EWTs in the residential real estate sector.

In 2015, Morocco passed a law authorizing the creation of real estate investment companies. The country is likely to experience more ERIT activity, thanks to well-developed local capital markets. In 2013, Kenya became the third African country to create a REIT. However, the development of Kenya’s ERT market has been slow due to inconsistent returns and lack of transparency of the underlying assets, investor knowledge and institutional support for ERTs.

In February 2021, two real estate investment companies (REIT) were launched by Acorn Investment Management to offer institutional investors the opportunity to invest in the lucrative student housing market. The future potential of ERTs is enormous due to the strong demand that is emerging, the insufficient supply of real estate assets and the need for exposure of institutional investors to real estate in West Africa.4

ACS Capital is a corporate finance consulting firm based in Dakar and specialized in real estate and infrastructure. ACS Capital provides financial engineering and structuring services aimed at solving Africa’s development problems.has experience in structuring real estate funds and ERTs in East Africa and Mauritius. For more information, you can reach us at [ ] .

Originally published at https://capital-acs.com