Thursday, January 8, 2014 12:00 PM / GTI Research
There is no gain saying that real estate investment especially in Nigeria is a viable investment class. This fact is further buttressed by the shortage of housing units in Nigeria, which according to the World Bank is about 17million units requiring
N59.5trillion to bridge this deficit.
There is also no gain saying that real estate construction in Nigeria has a huge capital requirement and requires a lot of ambiguous documentation and processing. These as well as the difficulty in disposing real estate property due to the relatively high cost of construction in Nigeria has made real estate investment unattractive, despite the immense potentials in the sector.
A Real Estate Investment Trust (REIT) eliminates all of the difficulties associated with real estate investment leaving behind only the potentials. By buying units of a REIT, investors are exposed to the immense potentials of the real estate sector without being burdened with the huge capital requirement and the illiquidity challenges that is associated with real estate investment and best of all is that they still earn annually from the rental income.
WHY HMK REIT?
Unlike the regular REITS trading on the NSE, HMK REIT has some added incentives which gives comfort to unit subscribers as well as ensure sustained returns.
ENHANCEMENTS TO THE HMK REIT
· Insurance of the REIT assets: The assets supporting the REITS are insured against losses from fire, water etc which may result to an interruption of business.
· Guarantee of the REIT income by Zenith Bank PLC: In the event that there is a shortfall in occupancy below 60%, Zenith Bank will pay 16.40% of the rental income to the REIT investors.
In addition to the aforementioned enhancements to the HMK REIT, subscribers to the REIT will also enjoy the following benefits:
· Exposure to high end properties
The sponsor has pre-identified six properties in strategic locations which collectively make up the initial underlying asset pool of the HMK REIT. The properties include
1. Lagos Ikeja Hotel (Best Western) Ikeja 2. A commercial property on Joel Ogunaike Street Ikeja 3. A commercial property located on Sobo Arobiodu Street In Ikeja 4. A residential property on Lugard Avenue in Ikoyi 5. Arizona Court comprising 14 apartments located in Ikeja GRA 6. Arkansas Court comprising 16 terrace houses located in Ikeja GRA · Attractive Returns on Investment · Occupancy Guarantee · Liquidity by Market makers · Participation of Reputable Organizations SOME RISKS OF INVESTING IN A REIT AND MITIGANTS PUT IN PLACE BY HMK 1. CONCENTRATION RISK
HMK REIT subscribers will enjoy a mandatory regular distribution of at least 90% of annual net income as dividend.
With high quality tenants, diverse corporate tenants profile and existence of long term leases with staggered rental renewal which cuts down the risk of mass vacancy, HMK REIT subscribers are assured of consistently high occupancy rate.
A primary market maker will be appointed by the Nigerian Stock Exchange to ensure the liquidity of HMK REIT units.
The HMK REIT is structured and backed by reputable organizations such as FSDH, Zenith Bank PLC, UBA, GTI, Leadway Assurance and Custodian & Allied Insurance among many other strong brands.
1. Lagos Ikeja Hotel (Best Western) Ikeja
2. A commercial property on Joel Ogunaike Street Ikeja
3. A commercial property located on Sobo Arobiodu Street In Ikeja
4. A residential property on Lugard Avenue in Ikoyi
5. Arizona Court comprising 14 apartments located in Ikeja GRA
6. Arkansas Court comprising 16 terrace houses located in Ikeja GRA
· Attractive Returns on Investment
· Occupancy Guarantee
· Liquidity by Market makers
· Participation of Reputable Organizations
SOME RISKS OF INVESTING IN A REIT AND MITIGANTS PUT IN PLACE BY HMK
1. CONCENTRATION RISK
RISK DESCRIPTION: The risk of rents falling due on the same date could lead to mass vacancy if all tenants vacate the property at the same time. This risk could also occur where only one tenant (corporate) occupies a property.
The Property Manager is to stagger the rent so that rents do not fall due at the same date to forestall vacancy occurring at the same time. Single tenant obligor risk is to be prevented by diversifying the tenant base across middle and high end tenants and by the property Manager maintaining good relationship with tenants. Property manager would also be abreast of lease terms and be proactive such that new tenants are secured preferably for longer lease periods before existing tenants leave or vacate a property. Lease exit notification period of about six months would be considered for insertion in the lease agreements where applicable.
2. HOLDING BENEFICIAL TITLE RISK
2. HOLDING BENEFICIAL TITLE RISK
RISK DESCRIPTION: These are the risks associated with the Declaration of Trust (DOT) Structure wherein the legal title to the REIT properties remains with the Sponsor and not the Trustee.
The DOT structure strips the Sponsor of all rights to deal with the properties of the Trust except as directed by the Trustee. In addition all title documents to the properties will be deposited with the Custodian to the REIT.
3. PERFORMANCE RISK
RISK DESCRIPTION: The performance of the Fund is directly dependent on the decision making abilities of the Fund Manager regarding assets selection and pricing. MITIGANTS
RISK DESCRIPTION: The performance of the Fund is directly dependent on the decision making abilities of the Fund Manager regarding assets selection and pricing.
The tested and proven knowledge of the Fund Manager in the management of real estate investment will help enhance the performance of the fund. The Investment Committee which oversees the activities of the Fund Manager is made up of seasoned professionals with in-depth knowledge and experience in the business of real estate in Nigeria and globally.
4. TAXATION RISK
RISK DESCRIPTION: Double incidence of taxation – first to the REIT and subsequently in the hands of the investors in the REIT.
Effort is being made to liaise with the relevant government body on the need to exempt REITs from taxation.
5. STRUCTURAL RISK
RISK DESCRIPTION: From time to time, the buildings that the REIT would invest in may be in need of significant structural repairs. Whilst it is anticipated that the costs of such structural repairs should not be significant, there is the potential reduction in income from high levels of structural repairs costs.
The Property Manager will conduct an evaluation of the assets for any structural defects from time to time and repair as necessary to forestall significant damage to the properties.
6. PROPERTY VACANCY RISK
RISK DESCRIPTION: Whilst the property manager strategies and administrators efforts are geared towards ensuring that the properties are tenanted at all times, there could still be vacancies at given times in the properties.
The Property manager will be abreast of tenancy expiry period and take proactive steps to secure new tenants in the event that existing tenants desire to vacate the properties.
In the event that there is a shortfall in rental income below 60% in an accounting year, the guarantor-Zenith Bank Plc will pay a sum of N150million to the REIT investors.
7. TRANSFER OF PROPERTY RISK
RISK DESCRIPTION: This is the risk that the properties will not be transferred to the REIT after the disbursement of funds.
The Sponsor has deposited unsigned Deed of release with the custodian prior to the Offer. These would be executed the day after SEC approval of Allotment before disbursement of Funds to AMCON and third party agents.
DISCLAIMER/ADVICE TO READERS:
While the website is checked for accuracy, we are not liable for any incorrect information included. The details of this publication should not be construed as an investment advice by the author/analyst or the publishers/Proshare. Proshare Limited, its employees and analysts accept no liability for any loss arising from the use of this information. All opinions on this page/site constitute the authors best estimate judgment as of this date and are subject to change without notice. Investors should see the content of this page as one of the factors to consider in making their investment decision. We recommend that you make enquiries based on your own circumstances and, if necessary, take professional advice before entering into transactions. This article is published with the consent of the author(s) for circulation to the online investment community in accordance with the terms of usage. Further enquiries should be directed to the author whose e-mail is GTI [email@example.com]