Offer Value – N30billion
Offer Price – N10 per unit
Opening Date – February 19
Closing Date – March 28
Fund Promoter – UPDC
Fund Manager- FSDH Asset Management Ltd
The Deal Synopsis?
UPDC has been into property development for years holding major property assets in Nigeria. The company which I reviewed sometime last year has had to deal with rising operational expenses as well as debt. As such it does not surprise me that the basis of the offer is to flog some of the assets that they have in exchange for cash ostentatiously funded by the proceeds of the offer.
UPDC plans to raise about N30billion from the sale of 3billion units of shares in a Real Estate Investment Trust (REIT) at N10 per unit. As the promoters of the REIT they will also subscribe to shares in the REIT even though they will not be stumping up any cash. They will own 40% of the REIT via an exchange of assets and shares. So in exchange for about 40% of the REIT (N12billion), they will be selling some of their choice properties for a value of N12billion. In other words, by subscribing to the REIT the utilization of N4 of your N10 share in the REIT is already determined.
Another N8.8billion out of the N30billion will also be used to purchase properties already owned by UPDC as detailed in the offer. Unlike the N12billion which was exchanged for shares, the N8.8billion cash will be paid to UPDC.
After the exchange of shares and cash payments subscribers to the deal will also expect to incur an additional cost of N673.7million as offer cost (2.2%) and another N1billion as VAT. The VAT amount is based on 5% of the asset cost of N20.8billion. For those who wonder whether VAT should be paid on sale of properties, I guess VAT is paid here because UPDC holds those properties as stock in its balance sheet rather than as Assets. Thus necessitating the VAT payment. Whilst this may seem logical, there is a reason to challenge this payment, and I expected UPDC to offer explanatory notes explaining the basis for charging VAT on this exchange.
At the end of this the REIT will have about N7.4billion in investable fund and based on the fund managers allocation proposal, the rest might be invested in some Fixed Income Securities such as Bonds. Actually 10% of the N30b raised will be invested in liquid assets/cash.
Interestingly, the assets would be transferred under a Declaration of Trust structure (DOT). The D.O.T basically involves a system of transferring beneficial ownership of assets to a trust without actually transferring title thus avoiding taxes and statutory fees associated with the sale of assets. This perhaps is where the VAT fees arose since an exchange of beneficial interest will surely be seen as vatable. An uncanny way of transferring taxes to the buyer rather than the seller right?
How did they value the assets and what assets are they selling to the REIT?
UPDC has some choice properties scattered all over Nigeria which has earned them rental income over the years. However, they are only selling 5 properties. One of the properties on sale the Victoria Mall Plaza on Aboyade Cole VI, is currently occupied by KPMG. See below;
UPDC has placed the combined “Open Market Value” of the assets at about N21.9billion and will be transferring to the REIT at about N20.8billion offering discount of about 5% on the asset value. They also claim the assets generate a combined N1.297billion in average annual income historically representing yield of about 6.26%. To make the investment look good they project the revenue will rise to N1.6billion or about 7.7%. The problem with this valuation metric is that cap rates in Nigeria is mostly 10% at least which would place the average vale of the combined assets at about N12billion instead of the N20billion transfer value.
What are the risk?
The offer prospectus outlines some risk for investors in the REIT which includes obvious ones such as political risk, market risk etc. However, one that comes to mind is the very unpredictable nature of the Nigerian market. Real Estate in Nigeria today is currently over valued due to a mixture of higher than normal construction cost, inefficiency in management of projects, high cost of taxes, and over bloated land cost. This stand the risk of a huge correction should the market find better and cost efficient way of construction thus bringing down values of properties including older ones which were built at a higher cost. The ability for businesses to continue to pay high rental cost is also a huge factor in determining the viability of income projections.
However, this may not be enough to deter investors who have an exit option should they sense a likely softening of the market in future. Shares on the REIT are tradable on the floor of the NSE.
What do I benefit from this?
Basically, you get to own part of a pool of real estate assets which will be managed by experienced managers. The assets is expected to generate income and the promoters project 7.8% payout yield at the ned of the first year and then 8.4%, 9.7% for the second and third year respectively. This essentially means for every N10 you invest you will be getting 78kobo per annum. Surely, you could get better returns in a government debt but the surely at 7.8% you get a better dividend yield than the 5% the stock market pays out on an average. You can also make capital gains on the sale of the units in the event that the Net Asset Value of the REIT goes up.
Should I buy
That depends on how deep your pockets are. REITs are an attractive investment for Pension Funds and large mutual funds who depend a lot of a fixed stream of income to fund periodic payment obligations. In Nigeria, most pension funds are mandated to invested on Real Estate businesses with a purely rentable model and as such buying into a REIT is a no brainer. For individuals who sort of fall into the category of those with deep pockets and looking to invest in the future then this may also seem like an attractive investment outlet. This REIT however posses some doubts as to the verifiability of the value placed on the assets being transferred by the promoters UPDC. In addition, REITS are relatively unknown investment outlets in Africa making the assumed liquidity of the trust units somewhat illiquid. Whats the point investing in an traded equity that can’t be easily sold or exited. For me though, I could certainly generate better yield on my investment without investing in a REIT. But then, portfolio diversification is always welcome.
REITS are an increasingly essential option in investing in Real Estates. Its very popular in the middle east and is gradually increasing its footprint in Africa. Nigeria certainly needs more of this to create a deeper market helping investors make better informed decisions. The Nigerian Stock Exchange only has two RIETs the Sky Shelter Fund (which I reviewed recently) and the Union Homes fund and they both witness minimal trade by volume and have a combined market value of about N14.5billion. The inclusion of UPDC’s REIT takes the number of REITs to three with a potentially combined value of about N44billion still about 0.09% of the combined market value of the equities on the NSE. For now though, this is a good development for the Real Estate Market in Nigeria.