Accessing the Needed Liquidity from State Owned Assets in the Face of Current Economic Realities

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Monday, June 08, 2020 / 11:17 AM / State Owned Enterprises Department of The Nigerian Stock Exchange (NSE)

 

Beyond the widespread health and human impact of COVID-19, the pandemic has had staggering economic implications across governments, corporates and individuals.  Faced with this reality and coupled with a slump in crude oil prices, many countries around the world have responded with different measures some of which have taken a more individualization approach choosing to focus on their citizens and economy irrespective of the global effect of adopted measures. In a March 2020 World Trade Organization report, 84 countries have taken trade related measures which includes export restrictions on essential commodities like food and medical products. Increased individualism, by countries in reaction to the present economic realities triggers a need for others to focus first on internal solutions to infrastructural and industrial challenges for continuous protection of its citizens and economy.


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Nigeria, as the largest economy in Africa and the 6th largest oil producer in the world was not exempt from the aforementioned economic challenges.  The infrastructural gaps and slump in the price of crude oil has had a direct hit on the economy and according to Fitch, the current oil price drop poses a serious threat to the Naira, since revenues from Oil and Gas sales represented about 57% of Nigeria's current-account proceeds and nearly half of fiscal revenue over the past three years.  Also, considering the 2020 budget, which was calculated based on an anticipated crude oil production of 2.18 million barrels per day at a price of $57 per barrel, the decline in the price of the Brent benchmark crude has forced the government to revise this to $30 per barrel while maintaining proposed production volumes.  We have also witnessed many states in the country revising budgets to reflect the current decline in revenues including funds received from the Federation Account Allocation.  Consequently, this poses as a funding challenge for the much needed infrastructure, a pivotal requirement to the growth of the economy.

 

Creating liquidity from the existing Government owned real estate assets (buildings, hospitals, hotels, industrial parks etc.) through Real Estate Investment Trusts (REITs) is an option to consider as an internal solution in addressing the financing gap for infrastructures development. The Securities and Exchange Commission (SEC) defined REITS as a Collective Investment Scheme which directly invests (acquire, hold and manage) in income generating real estate (and real estate related) assets using pooled funds from subscriptions of its participant investors/ unit holders. REITs can be issued on real estate assets belonging to the government by ring fencing such assets under a Real Estate Company where an assessment to ascertain the value of the assets is done.  The established REIT can then be used to access funding by selling units to investors through an initial public offering (IPO).


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The simplified model above describes government's divestments to the private sector by transferring the ring-fenced assets to a publicly owned Real Estate Company (REC). The REC then issues a REIT via an IPO with the proceeds transferred to the government. By government divestment in the assets, we have a structured publicly owned entity that primarily owns income-generating real estate for the long term and distributes income to unit holders s. Some other features of the REC would include the following;

 

  • Taxable as a corporation
  • Managed by a board of directors or trustees
  • Have no more than 50% of its shares held by five or fewer individuals

 

Adopting the model above comes with some benefits as the government gains the needed liquidity to fund further development of infrastructure, service existing debt obligations, effectively & efficiently managed assets previously owned by the government to generate more economic value.  Considering that the real estate industry is in tandem with other crucial sectors of the economy such as the construction, service and consumer industries, a viable and robust real estate investment industry will create job opportunities and distribute wealth across the country.  Most REITs are publicly traded like stocks on securities exchanges, whereby creating trading activities in the capital market with income flowing back to the unit holders (investors) as distributions (which are similar to dividends).  China, faced with housing challenges for its teeming population successfully used REITs.  The Chinese State Council set up a policy of using financial tools to accelerate economic development on December 4, 2008 with REITs recommended as a creative way to financing real estate.  This led to REITs being considered as a financial vehicle to securitize rental-housing units owned by the Chinese municipal governments and to help finance affordable housing through attracting private sector investment.  This in essence provided a new way for private sector participation in the development of affordable housing in China.

 

A World bank report in 2018 posited that Nigeria needs about 700,000 additional housing units each year for the next 20 years to keep up with growing population and urban migration. However, housing construction is now only about 100,000 units per year as housing demand in major cities such as Lagos, Abuja, Ibadan and Kano is growing at about 20% per year leaving a huge housing deficit of 24 million as at the current year 2020.  By selling income generating assets to REITs, property developers can unlock capital that can be more effectively deployed into new housing development projects.

 

For both the public and private sectors, embracing the opportunities in REITs can help reduce this housing deficit by unlocking the needed liquidity from the existing assets to fund affordable housing and in turn generate funding for infrastructure development.  The enactment of the 2007 Investment and Securities Act paved the way for the introduction of REITs in Nigeria, with UPDC Real Estate Investment Trust, Sky Shelter Fund and Union Homes Real Estate Investment Trust as the three major Real Estate Investment Trusts with a combined market capitalization of ₦21Bn as at 29th May 2020.  Considering the recommended REITs model will create a positive development to the capital market and the Nigerian economy.


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