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Would you have invested in buying a plot of land in Abuja FCT in 1980?

Imagine if you bought two plots beside the Transcorp Hilton Hotel in 1980 in the highbrow Maitama district of Abuja and sold in 2020, what return would you have made?

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Would you have invested in buying a plot of land in Abuja FCT in 1980?

Imagine if you bought two plots beside the Transcorp Hilton Hotel in 1980 in the highbrow Maitama district of Abuja and sold in 2020, what return would you have made?

That land in Abuja in 1980, in Nigerian parlance, was “virgin” i.e. undeveloped, no site and services,  you could not live there. It had no utilities like public water or roads, so the price of that plot of land in Abuja reflected that lack of demand. However, as we all know, if demand starts to outstrip supply of any commodity, prices will rise. As demand for land in Abuja FCT started to grow, the price of land in Abuja also went up.

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Land is a recommended asset class. Although it may offer no current income, it allows an investor trap in significant capital appreciation potential.

There are two ways to invest in land: buying to flip, i.e. buying land with the clear intention of trading your holdings, i.e., flipping to capture current capital appreciation on that land; or buying to hold, i.e., buying to hold your piece of real estate at a lower cost or discount today, i.e., off plan.

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[READ MORE: Is investing in commodities only for the brave?)

The difference really is the gestation period of your investment. Whatever your objective, your profit on any asset that does not pay a dividend is based on the purchase price the investor pays. The lower the purchase price, the larger your potential margin for profit in future is.

Let’s talk about trading, to flip land means you buy land in an area where you envisage development will occur in future. You take a position, wait, then sell as demand and prices rise. Land flipping is great when the economy is booming as that creates more disposable income leading to higher demand. When buying land, be careful what source of financing to use, It’s very risky to trade land with borrowed funds. This is because you are paying interest on that cash and have no way of determining when you can offload. In technical terms, you’re using an interest-bearing liability to fund a non-interest generating asset.

If you want to flip land, consider asking the seller for a time option to pay in full for the land, then try to sell the land and make payments from sales return, before making payments. Thus, don’t acquire land with debt without securing a buyer, if your intention is to sell the land; you may end up wiping your potential profits by holding and paying interest. You can also avoid interest by creating an investment club or partnership, and using Other People’s Money (OPM) to create a land fund. You can also negotiate an installment payment where you debit your discretionary cash annually to pay for your share of the land within the property owned by the land fund. Crowdfunding land purchase can eliminate interest cost and allows you build up a nice portfolio with real estate at the base, but with no interest cost.

Remember as always, the value of land is not only tied to a location but title as well. Ensure you get a lawyer to verify all land titles BEFORE you invest in land. Also note that If you buy land in a choice area and its value is high but you cannot convert that value to cash, then that investment is illiquid. You want to ensure you stay liquid in a weak economy.

With buying land to hold, you are investing in the asset “off plan”, i.e., at a discounted value, in the hope that the value will rise in future to reward your invested capital. With flipping, you are buying low to sell high, with off plan, you are buying an asset already priced high at a discount. It’s important you factor in the opportunity cost of tying down your cash for a long period.

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Buying land is simply a subset of real estate investing as a whole and in markets like Lagos State, it’s difficult to even find “virgin” unencumbered land to buy at meaningful discount to future prices, so let’s expand our investing universe.

[READ ALSO: 3 financial principles on debt, income & productivity)

What other ways to Invest?

REITS: Real Estate Investment Trust, like the UPDC REIT, are investment coys set up primarily to invest in income-generating real estate opportunities. These could be residential or commercial opportunities. REITS must generate and distribute dividend to investors, that’s what makes them unique. Thus, investors enjoy not just current income but capital appreciation as well. The UPDC REIT has a dividend yield of about 17.81% as at March 5th. Pretty good.

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ETF: It’s also possible to invest in specific or general international markets via Real Estate Exchange Traded Funds. The Vanguard Global Real Estate Index Fund VNQI, for instance, gives the investor exposure to global real estate markets outside the US with over 425 individual holdings across many countries. With an expense ratio of 0.12%, this fund has return on average of 5.31% in USD terms. Not bad, considering US interest rates fell below 1%-week one March 2020.

foreign investment, Here’s the easiest way to invest in your future 

Crowdfunding: Crowdfund and FINTECH have combined to offer real estate investors the diversification of REITS, with the higher returns of Private Equity, Companies like FundRise operate online investment platforms that allow any investor invest in private real estate market, i.e. the unlisted market. FundRise also allows an investor tailor a real estate Portfolio to suit investment needs. Thus, an investor can invest $500 and create a plan with 50% growth REIT and 50% income REIT.

According to FundRise, returns are higher in the private markets (12.3% in 20 years as compared to 8.2% in public US markets).

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In closing, real estate investing can be capital intensive but rewarding. REITS can offer capital stability with current income. There are opportunities locally as well as internationally, which has made investing in real estate not just cheaper but more rewarding. Ensure you have real estate as a part of a well-diversified portfolio.

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Power: Nigeria’s deal with Siemens – the birth of a new era?

Siemens’ position in the power value chain remains unclear given the huge investment it is committing.

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Power: Nigeria's deal with Siemens - the birth of a new era?

Recently, the Minister of Power, Sale Mamman disclosed that the power deal between Nigeria and Siemens AG, a renowned German firm, will lead to the upgrading of 105 power substations and construction of 70 new substations across the country. The Minister also disclosed that the Federal Government had made an initial N8.6bn commitment in the transaction. We recall in July 2019, Nigeria and Siemens signed a power sector deal which provides a blueprint on improving power generation and fixing the archaic transmission and distribution infrastructure in the sector. Notably, the president set a goal of achieving 7,000MW and 11,000MW of reliable power supply by 2021 and 2023.

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Siemens’ position in the power value chain remains unclear to us given the huge investment it is committing to make. Currently, the Transmission Company of Nigeria (TCN) is 100% owned by the government while the Gencos and Discos are privately controlled. While we see a possibility of Siemens getting a stake in TCN, we struggle to see how that will work for the discos and gencos given that Siemen’s huge invesments may mean they have to cede
control. Also, government’s desire to maintain a stranglehold on the power sector in bid to regulate electricity tariffs remains a key risk to any investment in the sector. We are also sceptical on Siemen’s ability to recoup its investment given that the liquidity squeeze in the sector attributable to non-cost reflective tariffs remains unresolved.

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Over the years, the widening deficiency in on-grid supply of power has forced consumers into costly off-grid alternatives, which account for 52% of electricity consumption, based on IMF estimates. According to the world bank, about 80 million people still lack access to grid electricity, making Nigeria the country with the largest access deficit in Sub-Saharan Africa. The institution further puts the national electrification rate at 55%, with rural electrification rate at a meagre 39%. Clearly, a lot of work is required in improving the supply of power across the country and ensuring its availability to unserved and underserved households and businesses.

READ ALSO: Delay in passing PIB creating uncertainties in Petroleum Industry – WEIN 

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CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.

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Columnists

No trophy for International Breweries after bland Q2 results

Brewing companies have found few and fewer opportunities to consolidate and generate quality turnover.

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No trophy for International Breweries after bland Q2 results

International Breweries Plc closed with a net loss in the second quarter (Q2) of 2020. They made a revenue of N25.3 billion, 28.5% shy of their achievements in the opening quarter (Q1) of the year.

Cost of sales consumed virtually all the revenue generated, taking as much as 86% in Q2 and 82.5% in Q1. This has been the sad trend/trajectory for International Breweries which ultimately almost guarantees that they close their books with a loss.

READ ALSO: Guinness Nigeria boss reveals factors pulling company’s profit

International Breweries Plc is a brewery company in Nigeria with its flagship product being the Trophy Bottle. Other products include Hero Lager, Eagle lager, Eagle Stout, and Beta malt. They have managed to improve revenue but haplessly struggles with rising costs of production and expenditures. The effect of government regulations, with the new excise duty implemented in 2018 hasn’t been palatable. Brewery companies generally do not have the luxury of tweaking their prices at any point in time to improve their topline. This is as a result of the immense sensitivity of the industry where increasing the price of a bottle instantly delivers the customer to the competition, albeit on a silver platter.

COVID-19 stalled operations and interrupted the accustomed seamless flow of activities around the world. Brewing companies have found few and fewer opportunities to consolidate and generate quality turnover. April 2020 ushered in a lockdown of vehicular movements and operations across major cities in the country. Bars, Clubs, Weddings, and other avenues for merriment, which hitherto are hubs for amassing turnover were given secondary attention until further notice. For companies in the industry, sales ordinarily would plunge, in light of these factors. Whilst we acknowledge and recognise the negative impacts the pandemic has wrought, it isn’t entirely accurate to allot all of International breweries travails to this.

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International Breweries, with the figures generated appears, nears its demise. Retained earnings for H1 showed a negative of N12.2 billion, this suggests that the company has made consistent losses. It also has borrowings amounting to over N107 billion naira secured by corporate guarantee with interest ranging between 7%-13%.  And with the ever-increasing negative value for retained earnings, death has been slow but consistent and almost inevitable.

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The statement of cash flow for H1 2020 exposes the true sources of cash inflow for International Breweries Plc. Only 5% were derived from operations, 0.8% from investing activities, and over 90% representing N162 billion from financing activities particularly rights issues.

International Breweries is in sinking sand and must devise new solutions quickly if it entertains any hopes of prolonging its longevity.

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Telecoms sector remains resilient as broadband subscriptions climb

Broadband penetration grew to 41.3% in June 2020 from 33.31% in June 2019 and 40.1% in May.

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Telecoms sector remains resilient as broadband subscriptions climb

Despite the adverse impact of the global pandemic on various sectors in the economy, the Nigerian telecoms sector has remained resilient. According to recent data on key industry fundamentals published by the Nigerian Communications Commission (NCC), the total number of broadband subscriptions grew 23.9% y/y and by 2.8% m/m in June 2020 to 78.8m subscriptions.

Similarly, broadband penetration grew to 41.3% in June 2020 from 33.31% in June 2019 and 40.1% in May. In addition, the number of internet subscribers continued to grow in June 2020, up 1.8% m/m and 17.2% y/y to 143.7m subscribers. We believe the m/m uptick in broadband penetration could be due to gradual reopening of the economy.

READ MORE: Exxon Mobil, Chevron record their worst losses in history

We recall that subscriptions declined on a m/m basis in April but showed recovery in May & June, reflecting the resilience of the sector. Industry players in the telecommunications sector continue to invest heavily in internet infrastructure in a bid to improve 4G LTE coverage across the country. Heightened competition among industry players for market share has also forced bundle prices lower, making internet usage very attractive to the average Nigerian.

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READ MORE: Federal Government to introduce new laws for online businesses  

With the advent of the global pandemic, we believe the growing use of digital channels for daily routine activities ranging from telecommuting, entertainment and social engagement bodes well for continued growth in internet penetration. This will be further supported by increasing smartphone penetration, favourable country demographics and a fledgling social media culture. Nevertheless, we believe the sector still requires more investment to bring it at par with more developed climes. With internet penetration still below 50% (39.58% as at April 2020), we think significant potential exists for telecom and internet service providers in Nigeria.

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CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.

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