Real Estate Investment Trusts: What is the Potential for Residential REITs to Increase Investment in Affordable Housing in Africa?

The introduction of Real Estate Investment Trusts (REITs) is one innovative approach that policy makers, property developers and real estate investors in certain African countries are promoting in an attempt to address finance constraints in real estate markets. While the REIT structure is found in the context of real estate markets more broadly, it is its potential application in the affordable residential property market which is the focus for CAHF.

REITs are essentially companies or trusts that own and often manage a portfolio of mortgages and / or real estate properties, and operate in accordance with certain rules and regulations. REITs allow investors – both institutional and retail (i.e. individuals) – to invest in portfolios of mortgages or large-scale properties through the purchase of shares. The shareholders of a REIT, in turn, earn a share of the income stream produced by the investment portfolio.[1]

A key distinguishing factor of REITs is the manner in which they aggregate diverse sources of funding and target them into real estate portfolios that extend beyond the limitations of individual projects. REIT regulations and legislation providing for preferential tax treatment and requiring high rates of profit distribution constitute additional factors that differentiate REITs from other property investment and financing vehicles. Together, these unique factors enable REITs to raise finance from investors who otherwise might lack access to – or be reticent to engage in – real estate markets.

From a developmental perspective, the establishment of a robust REIT framework constitutes an effective way for government to highlight real estate as an investment target. Residential REITs, in particular, represent an alternative mechanism for attracting institutional investment and raising capital in the context of housing, thus increasing the quality, supply and affordability of residential properties.[2] The internationally recognised REIT structure allows investors who potentially know very little about housing to invest in the residential sector.

Since 1994, legislation / regulations governing REITs has been introduced into a number of African countries, including Ghana, Tanzania, Nigeria, South Africa, Kenya, Rwanda, and Morocco. While the institutionalisation of the REIT structure has given rise to around 30 REITs in South Africa since 2013, the emergence of REITs in other African countries has gone at a slower pace. Case studies conducted in Ghana, Nigeria, Tanzania and South Africa indicate that the varying performance of REIT markets across the continent has a lot to do with the various contexts in which these markets are emerging.

Indeed, a number of critical enabling conditions need to be in place before REITs can thrive in any given context. These conditions include the existence of robust property rights, accurate records of title deeds, and reliable property valuations. Furthermore, appropriate rental market legislation, a comprehensive REIT framework, stable economic conditions, and the presence of engaged institutional investors are important. Finally, REITs require critical mass to attract investor interest, which can only take place in the context of a property market with substantial existing housing stock and / or the existence of capable, well-governed developers. [3]

Residential REITs – and affordable housing REITs in particular – face additional challenges in the African context. These include limited existing residential property markets; challenges around land regularisation and residential re-zoning; higher management costs; uncertain effective demand; and risks surrounding evictions. Such factors have contributed to the perception that affordable housing REITs are incapable of generating high enough returns to be market competitive, given the specific risks that exist in the affordable housing sector.

CAHFs study on the potential for residential REITs to increase access into affordable housing in Africa, provides an outline of the avenues that ought to be explored in order to transform affordable housing into an attractive asset class in the context of African REIT markets. We argue that arriving at a desirable risk-return profile requires private sector experimentation as well as government and NGO support. The private sector needs to be incentivised and supported in experimenting with various segments of the affordable housing market, as well as with the appropriate role for property development in the context of affordable housing REITs. It is proposed that if, in addition, government and NGOs intervene to minimise the risks and costs associated with affordable housing, a viable affordable housing financial model can be developed.

Such a financial model would have the impact of making the affordable housing segment an attractive target market for REITs, which in turn would stimulate much-needed retail and institutional investment in affordable housing markets across Africa.

References:

[1] NAREIT. What is a REIT? Available at: https://www.reit.com/investing/reit-basics/what-reit.

[2] Newell, G., Lee, C.L. and Kupke, V. (2015) The opportunity of unlisted wholesale residential property funds in enhancing affordable housing supply, AHURI Final Report No.249. Melbourne: Australian Housing and Urban Research Institute Limited. Available from: http://www.ahuri.edu.au/publications/projects/p72031 and Milligan, V., Yates, J., Wiesel, I. & Pawson, H. (2013) Financing rental housing though institutional investment – volume 1: outcomes from investigated panel. Melbourne: Australian Housing and Urban Research Institute, AHURI Final Report No. 202.

[3] Interview with Heri Bomani. Managing Director of Pangani Group.