REITs expands the investment outlet for pension funds

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Friday, 08 March 2013 / The Analyst 

The largest pool of ‘savings’ in the Nigerian economy are naturally the pension funds. The lack of participation of pension’s funds, currently estimated by the DG of PENCOM as at December 8, 2012 at N2.45 trillion (based on unaudited valuation reports) is a limiting factor to the recovery of the market; given its liquidity implication(s). The pension funds as at end of July 2007 was N655 billion ($5.12 billion).

On the back of this increase is an equal increase in the housing deficit in Nigeria and in the demand for commercial and high-brow residential housing in the country. Therefore, REITs by qualifying sponsors backed with a credible history and a validated underlying asset offers an investment opportunity that fits the investment profile for this fund class.

Because REITs are stocks with high-dividend yields, they are naturally desirable long-term investments for which pension funds can and should participate in, under its investment objectives, especially in the equities market; all things considered.

Outside the usual investment classes in the capital market i.e. Bonds and Treasury bills that PFA’s consider less risky for their funds, REITs are less volatile and offer the hedge against diminution in value.

Though, the pension fund managers are more familiar with the aforementioned classes and have had a less than stellar experience with the existing REITs listed on the bourse; the new commitment from PENCOM, working with the SEC, NSE and stakeholder groups in the capital market should lead to changes in the regulatory guidelines on investments; and to the benefit of REITS more than other classes.

Before now, direct real estate, private equities/venture capital and unlisted securities were listed by PENCOM in 2007 as un-authorised investments with future possibilities due to:

1.    Valuation and reporting issues;

2.    Liquidity/Exit;

3.    Transparency and disclosure requirements;

4.    Specialized expertise and the need for capacity building; and

5.    Need to build contributors’ confidence

PENCOM has since taken into consideration representations detailing the changes in the observations made above in its exposure draft on new investment options, as highlighted below:

It is expected that pension fund managers will explore and leverage their statutory investment limits and opportunity(ies) for indirect investments in the sector to structure their portfolios to take advantage of this investment outlet..

Pension fund managers in Nigeria are already beginning to realize that by diversifying their real estate allocations to include REIT stocks, they can increase both liquidity and returns, and decrease volatility.

Debra Cafaro, CEO of the Chicago-based health care REIT Ventas, and current chairwoman of NAREIT, says that “REITs are much more of a core vehicle than most private equity funds. Their leverage is lower and the success of the investment depends on the performance of the in-place operating real estate. REITs provide more predictable exposure to real estate as an asset class, whereas with private equity you’re really betting on a manager’s ability to allocate capital.”

According to one pension fund manager discussing a current REIT offer - “Liquidity and access to public capital are huge competitive advantages for REITs.”

Table below shows maximum investment limits for pension funds in Nigeria:



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