Every investor expects returns which might be viewed as revenue, net income, profit, dividends amongst others.
Committing funds into investment comes with huge risks, and most times, the return on investment takes care of the expected and unexpected risks such investment brings.
Real estate investments have its risks; however, it is important to know how the funds for investing in real estate can take.
Most times, it is direct funding from an investor and other times from multiple investors, provided there is proper understanding on achieving a common goal. As such, it is important to look at the REIT model as an investment tool.
REIT uses corporate form of ownership to channel funds from passive investor- shareholder into real estate usually quoted on the stock exchange. Quoting of the stock however, will be exempted while advocating for the consideration of the model.
A REIT is a company or corporation on trust that uses the capital pooled from many investors to manage purchases, finances and income-generating real estates.
It guarantees dividends to its investors with rules laid down by the Security Exchange Commission on how REIT works.
Rather than look at the main regulatory requirements from SEC, a well worded agreement and terms will be drafted by a lawyer with inputs from the investors on how to resolve issues, as humans are dynamic, and the tendency of not honoring terms cannot be ignored.
Real Estate Investment Trust, REIT, has been a successful vehicle over the years for the securitisation of properties.
The property and financial markets have developed equity financing techniques to reduce the challenges associated with illiquidity disadvantages of property investment.
Many global markets have accepted that securitization and unitisation of property investment can help defray the burden of ownership and risk within the real estate sector. Rather than having a single developer taking up all the risk, this could be broken into units for different investors to handle.
This is seen as a means of broadening the demand for property beyond the existing financial institutions, who are no doubt large enough to participate solely in real estate development.
The terms securitisation, is a general word to create securities that can be traded on the stock market, e.g., shares, bond, debentures and unit trust.
The application of securitisation and unitisation will form part of REIT terms in understanding how the model works and suitable for use in an economy like Nigeria.
Real estate investment requires funding for the following: Land acquisition, perfection of title, approval for developments, professional fees for all the built-in industry professionals, marketing cost and developers’ profits.
All the above will form parts of the cost and its unitisation will be broken into units for investors to see.
From the above, pooling and breaking of funds into units are the major components of the REIT. The write-up intends to reveal how the model helps an uprising investor or having several investors to pool funds together.
Looking at a prime plot within a developing area with high requests for small accommodation types, such as a studio and 1-bedroom apartments were suggested to a pool of investors.
Rather than have just an investor turning into a real estate developer overnight, it was intended to have a spread acquisition approval and all intended risks.
All the associated costs from acquisition to choice of internal finishings, were enumerated with a proper assessment from a vetted managers point of view. This was done in order not to lose sight of any aspect of the construction.
The sum was evenly shared, including the cost of maintenance and eventual disposal as well as cost of marketing and Agency fee.
Upon arriving at the final cost, this amount was evenly distributed amongst all the investors, while aiming at a unit held per investor.
In the terms of agreement, it was indicated that a current investor can indicate an interest to purchase after a satisfactory valuation. The growth that might have arisen in the development, reflects the relationship of either a gain or aloss.
The outcome being very encouraging as success was recorded, is propelling all the investors into a big scheme.
Note: Even with payment of tax, it is still worth the while for streams of income.
In view of the current economic reality in Nigeria, it is suggested to involve like minded investors to pool resources together from acquisition to final completion of the construction processes and have the final figure unitarised thereby spreading the risk and eventual profit that the investors will make.
Using an experienced Estate Surveyor and Valuer whose license and practice is regulated by Estate Surveyors registration Board of Nigeria, will be an added advantage.
Omotunde is an Abuja based sstate surveyor and valuer
