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Key things to consider when investing in real estate investment trusts

One of my avid readers has asked me about how he can get into investing in Real Estate Investment Trusts.

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Real Estate Investment Trusts

One of my avid readers has asked me about how he can get into investing in Real Estate Investment Trusts. He even asked me why he should and whether he should invest directly in real estate properties or in Real Estate Investment Trusts (REITS). I like the audacity, though, because, “my people perish because of lack of knowledge”.

What Is A Real Estate Investment Trust

Traditionally, a Real Estate Investment Trust (REIT) is essentially a closed-end fund created exclusively for holding real properties, mortgage-related assets, or both. In most cases, the purpose of REITS is to provide investors with the opportunity to invest in real properties while at the same time, enjoying the benefits derivable from investment trusts.

Before the advent of REIT, investors could only invest in real properties from the property market by buying completed houses or building one from scratch. Now, with REIT it has become possible to trade units of real properties in the stock market. REIT has afforded the small or retail investor the rare opportunity to invest in real estate.

Understanding is Key

Granting the fact that REITS are pools of properties and/or mortgages traded in the stock market, REIT investors or intending investors need to understand not only the stock market but also the property market so as to be able to make informed investment decisions. Unfortunately, while some investors have a good understanding of the property market, and some understand the workings of the stock market, only a few, if at all, have a proficient understanding of both. That is what makes investing in Real Estate Investment Trusts a little tricky.

Actually, the property market differs from the stock market in many ways. The pattern of price movements in the stock market differs from what it is in the property market. while prices move or change rapidly in the stock market, they do not change so rapidly in the property market. The good thing about REITs, however, is that, like mutual funds, and unlike direct ownership of real estate properties, they (REITS) are managed by professional REIT fund managers that understand the nitty-gritty of both markets (the stock and property markets).

In spite of the fact that they are being managed by professional fund managers in deciding on which REIT to invest in, investors should pay attention to the investment strategy of the REIT, and ensure that such strategies jive with such investor’s overall investment strategy and goal.

Investors should find out if the REIT they are interested in is diversified in both geographical location and property type. On the contrary, investors may be well-served if they buy into REITS that concentrate in a special type of property spread over different geographical locations.

READ: Why I lost money investing in stocks [lessons I learnt]

Advantages of a focused REIT strategy

a focused REIT strategy provides a better understanding of specialized markets. it reduces the number of markets a REIT needs to worry about and it enables both the investors and managers to understand the REIT better. Furthermore, it grants both the manager and investors the freedom from having to be experts in all markets and it reduces increased management cost due to the need to take care of many property markets.

 

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Disadvantages of focused REIT strategy

Though focused strategy has some advantages, it comes with some disadvantages too. It offers poor-risk reduction and does not allow for better property diversification. It does not offer customers or investors multiple locations that may satisfy their needs and it may increase susceptibility to regional market trends and economic swings/changes which may result in the possibility of large fluctuations in income streams.

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How to know whether a REIT is focused or diversified

There is no hard and fast way to know whether a REIT is focused or diversified but one way of knowing is to look at the percentage of investment in property types. The norm is that if a REIT has more than 75% of its assets concentrated in one property type, it can be classified as a REIT with a focused strategy.

REITs in Nigeria

Someone reading this article may have asked, are there REITs in Nigeria? there are, but because they have not been that popular, you are not mistaken into thinking or even believing that there are no REITs in Nigeria. There are three major Real Estate Investment Trusts in Nigeria, UPDC Real Estate Investment Trust, Sky Shelter Fund and Union Homes Real Estate Investment Trust. UPDC is the largest of the REITs by asset, having an asset value of N33.2 billion as at June 28th 2019, followed by Union Homes’ N9.9 billion and then Sky Shelter’s N2.4 billion.

[READ: This report makes a case for dumping stocks in this sector]

Union Homes appears to be a focused REIT in that out of its 9 properties, only 2 are located in Abuja, with the rest located in Lagos. Those in Abuja have very low occupancy rate ranging from 0 to 20% while those in Lagos have occupancy rates of between 80% to 100%.

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Sky Shelter also appears to be a focused REIT, again, out of its 7 properties, 2 are in Abuja with unknown occupancy rates and they are available for sale. On the other hand, those in Lagos are fully occupied.

Is Real Estate Investment Suitable for you and Your Portfolio?

Diversification, they say, is the milk and honey of investing. This is because a well-diversified portfolio gives an investor exposure to upside potentials as well as shield against downside risk. One investment that improves portfolio diversification is real estate investment. The good news actually is that many are involved in real estate investing, in one way or the other, either as owner-occupied or commercial.

Real estate investments have proved profitable in the past and continue to be profitable today if done right. Performance analysts, worldwide, have noted that real estate investments at times outperform equity investments. Unfortunately, irrespective of the profitable return profile of real estate investments, it may not be suitable for everyone, except of course, when it is for owner-occupation. However, a lot of people, in most investment forums online, advise people to go into real estate, as soon as they ask for advice on the best way to invest a given amount of money.

To invest in real estate, one needs to answer some questions, some of which I am posing in this article.  If you answer yes to these questions, then you are suited for real estate investing.

Can you tie up the needed capital for a minimum of several years?

Real estate investing, unlike investments in equities and bonds require sizable amount of money to build or buy the property in addition to money required to cover unexpected repairs or damages, howbeit contingent. By their nature, real estate properties are relatively difficult to sell within a short period, they are not as liquid as stocks and bonds, as a result, you should be prepared to hold the properties for as long as it takes to sell, which may run into several months depending on some factors.

Are you willing to remain in a certain location for the foreseeable future?

Due to the lack of portability of real estates, it tends to tie the investor down to a given geographical location. In addition, the fact that real estate properties require attention, which may be often frequent, you may need to be near enough to the property for the required supervision or repairs.

Do you have the time and expertise to manage the properties effectively?

Rental property often requires a lot of maintenance, new tenants must be found as vacancies arise, rents must be collected, bills relating to the rental property must be paid and, in most cases, records must be kept. All those demands full-time attention which, if given, may imply forgoing one’s full-time job unless the investor decides to hire a management company to manage the rental property. That option too, has its own pros and cons.

[READ: Despite setbacks, Nigeria’s real estate investors to expect a windfall in 2019]

If you answered no to any or all of the above questions and still desirous of investing in real estate, then direct investment into real property, except for owner occupation, may not be for you and as such, a better option will most likely be to go through Real Estate Investment Trusts.

Uchenna Ndimele is the President of Quantitative Financial Analytics Ltd. MutualfundsAfrica.com and mutualfundsnigeria.com (both Quantitative Financial Analytics company website) is a leader in supplying mutual fund information, analysis, and commentary on African mutual funds. We provide reliable fund data; and ratings information that will add value to fund managers, the media, individual investors and investment clubs.

5 Comments

5 Comments

  1. Busayo

    October 5, 2019 at 12:22 pm

    Hi, what would you recommened of crowd-funding innvesment platforms for real estate like coreum group, coreumgroup.com i don’t know if they fall under your REIT category, will appreciate a reply

  2. jide oluwadeyi

    October 18, 2019 at 2:52 pm

    busayo, coreum is co-investing in real estate. it can not be categorized as REIT but its trying to simply real estate investment and still has the same benefits

  3. Joseph

    November 12, 2019 at 7:04 pm

    Hi you mentioned UPDC as an REITS,what is the full name and I will appreciate if you provide the companies contact add….thanks

    • Samuel Oyekanmi

      November 13, 2019 at 9:24 am

      Hi Joseph, Good morning
      With respect to your question, UPDC REITS is UACN Property Development Company, operated as a Division of UAC of Nigeria Plc before it was incorporated as a public limited liability company and listed on the Nigerian Stock Exchange.

      HEAD OFFICE
      UACN Property Development Company PLC
      UAC House
      1-5 Odunlami Street, Lagos.

  4. Coloma River Holdings

    December 13, 2019 at 11:24 am

    Well written and wonderful article full of information. Thanks for sharing such a great article with us

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Merger, Tax incentive boosts BUA Cement FY 2019 result

BUA Cement Plc recently released financials reveal a 47.5% increase in revenues of N175.52 billion up from N119 billion in 2018.

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BUA Cement gives succour to host communities in Edo

One of the industries set to experience the downsides of the Covid-19 pandemic is the construction industry. Given the slowdown in construction activities as a result of the lockdowns and constrained economic activities, the reasons are not farfetched.

Prior to the outbreak of the pandemic, Globe Newswire had predicted an accelerated growth pace of the global construction industry from 2.6% in 2019 to 3.1% in 2020. This growth has now been revised to 0.5%. What is even more daunting is that the revised growth rate is based on the assumption that the outbreak will be contained across all major markets by the end of the second quarter of 2020.

It is only after that (including freedom of movement in H2 2020) that events could facilitate reverting to the normal course of activities to foster businesses in the industry like BUA Cement or those that depend on it to restart activities.

Nigeria’s third-largest cement company, BUA Cement Plc, however, still has its 2019 victories in order. Involved in the manufacturing and sales of cement, BUA Cement has 3 major subsidiaries and plants in Northern and Southern Nigeria.

(READ MORE:Update: BUA Cement Plc lists N1.18 trillion shares on NSE)

With a market capitalisation of N1.18 trillion ($3.3 billion), BUA is the third most capitalised company on the NSE. Its recently released financials reveal a 47.5% increase in revenues of N175.52 billion up from N119 billion in 2018.

Kalambaina Cement Line 2, BUA Group, Kalambaina Cement, CCNN, Merger, Tax Incentive Boost BUA Cement FY 2019 Results

The company’s profits also increased by 69.1% from N39.17 billion in 2018 to N66.24 billion in 2019. Core operating performance was strong, and this was supported by strong cement sales in the domestic market, impairment writes back, and other income.

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The main reason for the company’s increased earnings is from the cost synergy and increased revenue as a result of the merger that took place between CCNN Plc and Obu Cement Company Limited.

There was also a striking jump in its income statement on its tax for the year. For FY 2019, it incurred a tax expense of N5.6 billion, in comparison to the N24.9 billion tax credit it received in FY 2018.

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This was as a result of a reversal of previous tax provision made on Obu Line 1; it received approvals for an extension of the company’s pioneer status on Obu line-1 and Kalambaina line-2 in February 2020, to leave effective tax rate at just over 8% in 2019. The pioneer status will help the company save funds that will otherwise have been spent on higher taxes.

(READ MORE:Dangote Cement to access more debt funding)

BUA reported an impressive FY’19 result. Its performance shows the growing strength of the company and its increasing market share. On the back of the strong performance, management declared an N1.75 dividend per share that translates to a dividend yield of 5.5% on current prices.

Cash flow position was also robust with a strong closing cash balance – from N2.8 billion in 2018 to N15.6 billion as at year ended 2019. The company’s growth, as well as the impact of its merger, present a great buy opportunity of the highly capitalized, low-cost stock. As of today when the market closed (21st May) its share price stood at N35.60 from a 52-week range of N27.6 and N41.

READ ALSO: COVID-19: Best and worst case scenarios for the Nigerian economy

What we see is a great growth stock further heightened by the population expansion and increased urbanization. However, we expect the impact of the Covid-19 pandemic to be felt from the Q1 results of the company.

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The industry could slow down for the year as the level of commercial construction also slows down. Yet the best part of holding stocks like this is that even with stalled operations for a period, a resurgence will always emerge.

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Analysis: Airtel Nigeria is winning where it matters

Airtel has left no stones unturned in ensuring that its provisions are top-shelf – subscribers to the network, of course will have their own ideas.  

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Analysis: Airtel Nigeria is winning where it matters.

Airtel might have won our hearts over with internet-war adverts starring our favourite tribal in-laws, but its fundamentals are what will make us the bucks that keep us happy. Airtel Africa Ltd is a subsidiary of Indian telecoms group, Bharti Airtel Ltd; the group has left no stones unturned in ensuring that its provision of prepaid plans, credit transfers, mobile internet services, messaging, roaming facilities and more, are top-shelf – subscribers to the network, of course, will have their own ideas.

Since last year when Airtel Nigeria became the second telecommunication company in Nigeria listed on the NSE, the company has experienced a steady level of growth. With a presence in 14 African countries, the group’s strength lies in its diversity with stronger companies mitigating the poor performances of others.

Performance Overview: Airtel Africa 

Airtel Africa’s report for the year ended March 2020, revenue jumped by 10.9% from $3.1 billion at the year ended 2019 to $3.4 billion in 2020. The consolidated profit before tax also jumped by 71.8% from $348 million in 2019 to $598 million in 2020. However, profit for the period dropped by 4.23% with earnings of $408 million in 2020 from the $426 million it had earned in 2019. A reason for this is the tax figure that moved from a credit of $78 million in 2019 to tax payments as high as $190 million in 2020. Total assets also jumped by 2.41% from 2019’s value of $9.1 billion to $9.3 billion in 2020 primarily as a result of their acquisition of more property, plant, and equipment (PPE). The total customer base grew by 9.3% to 99.7 million for the year ended.

Full Report here.

Revenue growth of 10.9% was driven by double-digit growth in Nigeria and East Africa. However, the rest of its African operations experienced a decline in revenue. Its success in Nigeria is especially commendable, considering the fact that the company lost more than 100,000 subscribers in Nigeria between December 2019 and January 2020. Raghunath Mandava, Chief Executive Officer, remarked that the results which were in line with the group’s expectations, “are clear evidence of the effectiveness of our strategy across Voice, Data and Mobile Money.”

(READ MORE: NCDC and NNPC-IPPG reinforce #TakeResponsibility theme with multi-lingual campaign)

Behind The Numbers – Nigeria

Airtel Nigeria’s performance indicates the company is making the right calls in a very competitive industry. Nigerians are fickle when it comes to data and voice but will spend if the service is right. The company grew its data revenue by a whopping 58% to $435 million a sign that its strategy to focus on data is working. Voice Revenues for the year was up 15% to $850 million. In total, Airtel Nigeria’s revenue was up 24.4% to $1.37 billion. Ebitda margin, a number closely watched by foreign investors 54.2% from 49% a year earlier. Operating profit for the year ended also jumped by 52.6% for the year from 2019 and 32.4% from Q1 2019. Total customer base in Nigeria also grew by 12.5%.

Regulation forces Airtel Africa to initiate shares listing in Malawi , Analysis: Airtel Nigeria is winning where it matters.

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Nigeria is surely critical to Airtel Africa’s future seeing that it contributes about one-third of its revenue. Recent results thus indicate it is winning where it matters most and it must continue to stay this way if it desires to survive a brutal post-COVID-19 2020. Telcos are expected to be among the winners as Nigerians rely more on data to work remotely but there are other players in this game. Concerning the impact of the pandemic, he explained that at the time of the approval of the Group Financial Statements, the group has not experienced any material impact arising from the impact of COVID-19 on its business.

On cash flows…

The group has also taken measures to enhance its liquidity. The CEO explained that it is moving its focus to enhance liquidity towards meeting possible contingencies.

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“Having considered business performance, free cash flows, liquidity expectation for the next 12 months together with its other existing drawn and undrawn facilities, the group cancelled the remaining USD 1.2 billion New Airtel Africa Facility. As part of this evaluation, the group has further considered committed facilities of USD 814 million as of date authorisation of financial statements, which should take care of the group’s cash flow requirement under both base and reasonable worst-case scenarios.”

To this end, they have put in the required strategies to preserve its cash as its cash and cash equivalents, consequently, jumped by 19.1%.

(READ MORE: COVID-19: MTN says it has put strict measures in place to preserve resources)

Buying opportunity

Investors looking at this impressive result will be wondering if this portends a buying opportunity. Airtel Nigeria closed at N298 on Friday and has remained at this price for about a month. The stock is quite illiquid and is not readily available to buy.

It’s the price to earnings ratio of 4.56x makes it quite attractive. Further highlighting this opportunity is its price-to-book ratio which is as low as 0.5273, suggesting that the stock could be undervalued. Whether it is available to be bought, is anyone’s guess.

 

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Analysis: Nestlé strong but exposed.

Being a market leader is great, but in times of economic despair, it can quickly turn you into prey.

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Why Nestle Nigeria’s return remains strong - EFG Hermes, Nestle Nigeria Plc appoints new Director, Nestle Plc: FY 2019 Revenue beats estimate; but profit underperforms, GTB, Zenith Bank, & Nestle emerge as Renaissance Capital’s top stock picks

With about six decades of being the choice companion for families within Nigeria and the diaspora, Nestlé Nigeria Plc has positioned itself as one of the largest food and beverage companies on the continent. Owing to the expansive growth of Nigeria’s population – one projected to reach 300 million by the year 2030, as well as the growing middle class, the FMCG sector has a very positive outlook.

Consequently, Nestle’s leadership in the industry and its huge market size expectedly gives it a huge advantage. However, with the global economy barely racing against the impact of the Covid-19 pandemic, even the brimming FMCG sector will experience its own level of disruption.

Nestle’s recently released Q1 2020 financials reveal a revenue decline of 0.9%, as it dropped to a marginal ₦70.33 billion from the ₦70.97 billion turnover it garnered in Q1 2019. The profit before tax also experienced an 8.7% drop while the profit after tax had a 12.84% drop, both yielding ₦17.5 billion and ₦11.2 billion respectively, for the first quarter of this year. This is predominantly owing to its increased losses from its overseas activities.

READ ALSO: Italy to invest in Nigeria’s agric sector

The company procures all of its raw materials on a commercial basis from overseas and local suppliers; consequently, the percentage of its supplies dependent on international suppliers had a negative impact on its Q1 2020 financials. Its profits were plagued by a foreign exchange loss of ₦154.7 million from ₦18.9 million, an even higher loss of 720.6%. While the company did not disclose the value of its export revenue, we believe it too might have suffered from reduced exportation in the latter part of the quarter.

The group has since been taking on expansionary projects, such as its launch of a second beverage production plant in Ogun State in February of 2018. The company, on a continuous basis, explores the use of local raw materials in its production processes, contributing its own quota to the Nigerian economy.

READ MORE: Polaris Bank’s profit rises to N26.2 billion from N2.8 billion

Just last week, Nestlé’s stocks went up 2.56% to close at ₦1000, a price it still currently holds today after markets closed. Its price to earnings ratio is 18 and its earnings per share (EPS) of 55.54, signal an investor sentiment of confidence. However, its high price to book ratio of 13.9865 reveals that the company is slightly overvalued and its price of ₦1000 makes it attractive primarily to institutional investors that can afford to purchase large volumes of the stock enough to benefit from its steady growth in value. The company had proposed a dividend payout of ₦45 per share. This also comes after paying ₦25 per share interim dividends earlier. Its dividend yield at the time of writing this is 7%, further heightening the possibilities for the income investor.

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While the company has strong fundamentals governed predominantly by its position as a market leader, its years of experience, and its existence in the FMCG sector, it too might not have a smooth sail in the coming quarter. Its overseas business from both the supply and the demand sides are expected to experience a further decline, ultimately resulting in an even lower relative turnover and lower earnings.

READ MORE: Cadbury Nigeria reports N638.9 million profit for Q1 2020

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We also expect the decline in average disposable income of Nigerians from loss of jobs and an overall wariness of the economic impact of the pandemic, to further drive down turnover; however, sound operational efficiencies and cost control/ profit strategies by the group could ease the burden. The company fundamentals remain strong but its exposure to consumer disposable income remains a major concern. There is always a cheaper alternative and when your pocket empties your choice for cheaper substitutes swells.

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