Nigeria has the potential to lead in the Africa Real Estate Investment Trusts, REITs ;this is according to PricewaterhouseCoopers, PwC West Africa Tax Leader, Taiwo Oyedele in a paper presentation at the NSE REITS conference on Tuesday, themed; REAL ESTATE INVESTMENT IN SUB-SAHARA AFRICA: THE ROLE OF THE CAPITAL MARKET.
In his presentation which focuses on Regulatory, Tax and Role of Capital Market in Developing REITs in Nigeria and Sub-Sahara Africa, Oyedele said that Global market capitalisation of REITs now stands at approximately USD 1.7trn from approximately USD 734bn in 2010.
Real estate investment schemes (“REIS”) represent an innovative approach to fund real estate projects. It is an entity which is primarily engaged in and invests in income generating real estate and or real estate related assets Definition.
REIS are considered as both an asset class and a security as they provide a practical, effective and efficient avenue for investing in real estate through the transfer of legal interests.
They own real, tangible assets and tend to have long tenancy agreements implying stable, steady income streams.
Oyedele opined that there is need to keep Taxes, Legal and Other Considerations Attractive and simple, Competitive with ease of operation, having Consistent and predictable rules.
He said there is an overall need for a REITs specific regime to ensure treatment as pass-through, ease of set-up, operation and disposal.
Also, Head, Real Estate Finance, West Africa and Executive Director Stanbic IBTC Capital, Adeniyi Adeleye seconded on the need for better regimes when he said; ‘’A successful REIT regime will provide a practical and effective conduit for pooling funds from a diverse range of investors into prime real estate assets.’’
Adeleye further explaining that ‘’Continuous engagement and collaboration between regulatory stakeholders will help spur the needed reforms to position Nigeria as a regional hub for REIT listings over the medium to long term horizon.’’
According to Adeleye, there are three Core Elements for a Successful REIT and they are;
- Regulation & Corporate Governance Standards
- Asset Creation, Consolidation and Concentration
- Valuation & Risk Management Framework
He outlined the following recommendations for better and more functional REITs in Nigeria;
. Finalise and implement SEC’s draft amendments for the REIT market
- Continue collaborative engagements with FIRS to revise existing tax guidelines for REITs
- Explore potential of Pension Fund capital flows in stimulating the REIT market
- Initiate discussions with the PENCOM to address existing guidelines for Pension Funds
In Nigeria, there are two legal types of REITs; Company REITs and Trust REITs. While there are three legal forms of REITs which are Equity REIT, Mortgage REIT and Hybrid REIT and they are modelled after mutual funds.
For the Capital requirements for REITs in the country, Oyedele said there are no capital requirements for a REIT if listed, however, it must meet NSE requirements.
There are no listing requirements also. REIT can be listed or unlisted. The NSE has certain requirements for listing but no additional requirements that must be met in order to achieve REIT status beyond those mandated by SEC with no restrictions on investors.
In terms of Asset/income/activity tests,
Equity based – 70% in real estate or real estate related assets, a maximum of 10% in liquid assets, and 20% in other assets.
Mortgage based – 70% in mortgage assets, a maximum of 10% in liquid assets, and 20% in other real estate assets.
Hybrid based – at least 40% in real estate, at least 40% in mortgage assets, 20% in real estate related assets. However, one cannot borrow beyond 25% of the shareholder’s fund.
For Distribution requirements, REITs must pay dividends on at least 90-95% of taxable income.
Oyedele explained that for Tax treatment at REIT level, it is Liable to Companies Income Tax, CIT at the rate of 30%. However the very features of the REIT enable or activate pockets of tax exemptions such as that issued by the DMO in 2010 for various instruments including MBS and ABS. Capital allowance is claimable as they are ‘in use’ for the generation of the business profits. This enables further relief on the computed taxable profits for CIT purposes for a period of ten (10) years on each of the investment property.
In relation to Withholding tax on distributions; he explained that Dividends of publicly traded REIT securities are exempt from withholding taxes (WHT) in the hands of the investors. Value Added Tax (VAT) and Capital Gains Tax (CGT) on sales of these units or securities are also not applicable. This exemption does not preclude the REIT from paying CIT at 30% of their taxable income.
Tax treatment at the investor level; Dividends of publicly traded REIT securities are exempt from withholding taxes (WHT) in the hands of the investors. Value Added Tax (VAT) and Capital Gains Tax (CGT) on sales of these units or securities are also not applicable.