Challenges and Performance of adopting REIT Structure in Financing Real Estate in Nigeria

By Adetayo B Odunsi BSc. Estate Management 2007, University of Lagos Nigeria

Submitted to the School of Real Estate and Planning In Partial Fulfilment of the Requirements of the Degree of Masters of Science in Real Estate Finance and Investment

At the

Henley Business School, University of Reading

August 2011

Project Supervisor: Professor Simon Stevenson

Word Count: 10,791

A. B Odunsi 2011

DEDICATION I dedicate this project to my Lord, Saviour and Shepherd Jesus Christ who has made this possible. Thank You

A. B Odunsi 2011

ABSTRACT Within the last decade, many more countries have embraced the concept which started in Massachusetts in 1960 called Real Estate Investment Trusts. Japan (2001), Bulgaria (2004), Hong Kong (2005), UK (2006), Germany (2007), Philippines (2009), Finland (2010) and India is set to join the train soon. Nigeria, the West African oil giant has not been un-participatory as the necessary legal and structural framework for REITs was put in place in 2008. It is then research-worthy to enquire into the lack of patronage of this globally acclaimed real estate finance and investment structure. Quantitative methods were engaged in investigating the challenges real estate and finance professionals may be encountering in adopting the REIT structure. the major road blocks. An empirical approach was then adopted in assessing how REITs in other emerging economies have performed. South Africa and Turkey were selected for these tests using vector auto-regression models to examine the responses of REIT prices to some macroeconomic indicators. It was seen that both REITs behave quite differently. While South African REITs were seen to be solid defensive, Turkish REITs are sensitive to interest rate risks. However, the VAR decomposition showed that majority of changes in REITs is caused by the REITs themselves. These findings and review of literature go a long way in showing what professionals and regulators must address and contend with if REITs will create a success story in Nigeria. This produced a consensus that the poor market conditions, lack of expertise and high conversion costs are

A. B Odunsi 2011

TABLE OF CONTENTS List of Exhibits 6 -7 Chapter One: Introduction.. 8 Background of Study.. 8 Economic Background. 9 Overview of Real Estate in Nigeria.11 Statement of Problem12 Justification of Study..12 Research questions12 Aims and Objectives..12 Organisation of the Report ..13 Chapter Two: Literature Review..14 Real Estate Finance..14 Real Estate Equity Finance..14 Shareholders Equity14 Private Equity14 Joint Venture 14 Shared Ownerships..15 Fractional Ownership16 Time Share.16 Real Estate Investment Trusts16 Real Estate Debt Finance.16 Mortgage Loan..16 Project finance..17 Sources of Real Estate Finance in Nigeria18 Primary Mortgage Institutions (PMIs) ..18 Secondary Mortgage Banks ..18 Commercial Banks...18 Insurance companies19 Pension Funds...20 Cooperative Societies21 The Informal Sector21 Background of Real Estate Investment Trusts (REITs).21 REITs in South Africa.....22 REITs in Turkey.............24 REITs in Nigeria.............24 Union Homes Hybrid REIT27
4

A. B Odunsi 2011

Financial Projections 27 Investment Projections..27 Performance of Union Homes Hybrid REIT28 Chapter Three: Research Method.29 Introduction29 Research Approaches.29 Qualitative Research Approach30 Quantitative Research Approach.30 Mixed Research...31 Research Design..32 Selective Sample Survey...32 Performance Analysis .......33 VAR and VEC Models........33 Limitations of the Study.................33 Chapter Four: Data Analysis.......34 Selective Survey Sample...............34 Sources of Finance..................35 The REIT Structure..................36 Performance Analysis of Union Homes Hybrid REIT..37 Vector Auto-Regression Model.......38 Data Used..................................38 Similarities and Correlation.......39 Descriptive Statistics................40 VAR Analysis: Co-Integration Tests.42 VAR Analysis: Lag Length Selection43 VAR Analysis: Granger Causality Tests...43 Impulse Response Functions.43 VAR Decompositions..45 Interpretation of Results..46 Chapter Five: Conclusion..48 Summary.48 Conclusion and Recommendations50 Areas for further Study..51 References Appendix

A. B Odunsi 2011

LIST OF EXHIBITS Exhibit 1.1 - Nigeria: GDP Growth..9 Exhibit 1.2 - Nigerian Population.10 Exhibit 1.3 - Key Players in the Nigerian Real Estate Market11 Exhibit 2.1 - Mortgage outstanding as % of GDP (2006)17 Exhibit 2.2 - Credit to core private sector19 Exhibit 2.3 - Total Insurance Business Investments (N Million)..20 Exhibit 2.4 -Total Pension Assets (N' billion).20 Exhibit 2.5 -Differences between South African PLSs and PUTs..23 Exhibit 2.6 -Summary: Comparison of South African, Turkish and Nigerian REITs25 Exhibit 2.7 -Tax treatment at REITs level...26 Exhibit 2.8 -Tax treatment at Shareholders level..26 Exhibit 2.9 -Structure of REITs in Nigeria..26 Exhibit 3.1 Research Design/Structure.32 Exhibit 4.1 -Type of companies surveyed..34 Exhibit 4.2 - Cadre of Respondents34 Exhibit 4.3 - Respondents Sources of Finance35 Exhibit 4.4 - Currently considering adopting REIT structure..35 Exhibit 4.5 - Respondents encountering challenges adopting REIT structure36 Exhibit 4.6 - Challenges encountered in adopting REIT Structure in Nigeria..36 Exhibit 4.7 - Respondents considering adopting REITs in future37 Exhibit 4.8 - 3-Year Financial Projects of Union Homes Hybrid REIT...37 Exhibit 4.9 - Financial Summary of Union Homes Savings and Loans Plc..38 Exhibit 4.10 - Definition of variables and their data sources39 Exhibit 4.11 - Inflation: Nigeria, South Africa and Turkey (2006:2011Q2)39 Exhibit 4.12 - Inflation Rates: Correlation...39 Exhibit 4.13 - Interest Rates: Nigeria, South Africa and Turkey (2006:2011Q2).40 Exhibit 4.14 - Interest Rates: Correlation40 Exhibit 4.15 - REIT Index: South Africa and Turkey (2006:2011Q2).40 Exhibit 4.16 - REIT Index: Correlation.41 Exhibit 4.17 Probability Distribution of South Africa REIT Returns.41 Exhibit 4.18 - Probability Distribution of Turkish REIT Returns..42 Exhibit 4.19 - Co-integration Tests..42 Exhibit 4.20 - South African REIT Impulse Response.44 Exhibit 4.21 - Turkish REIT Impulse Response.45 Exhibit 4.22 - South Africa: VAR Decomposition.46

A. B Odunsi 2011

Exhibit 4.23 - Turkey: VAR Decomposition46 Exhibit 5.1 - Summary of Survey findings..48 Exhibit 5.2 - Ranking of Challenges to adopting REIT structure in Nigeria..49 Exhibit 5.3 - Summary of VAR Analysis findings50

A. B Odunsi 2011

CHAPTER ONE: INTRODUCTION Background of Study The purpose of this study is to investigate the challenges of adopting the Real Estate Investment Trust (REIT) structure in financing real estate in Nigeria. The study further aims at assessing the performance of REITs in other emerging economy with a consideration at making inferences to the Nigerian situation. Globally, indirect investment in Real estate has become a major medium through which real estate finance is readily sourced. While there are various real estate securities and indirect real estate classes, Real Estate Investment Trusts (REITs) in particular is a key indirect real estate class and forms an important part of investors diversified portfolios (Aktan and Ozturk, 2008). In 2008 due to the agitations and moves made by the Nigerian Security and Exchange Commission (SEC), The Nigerian Investments and Securities Act 2007 (ISA 2007) was passed into law by the government. This legislation provided the legal and organisational framework for investment in real estate using the REIT structure in Nigeria. It also further provided for Real Estate Investment companies (REICs). This structure is laced with benefits to both investors and real estate/finance professionals who are seeking new media to finance their real estate developments, loans and mortgages. To Investors, REITs provide a way to invest in real estate without actively owning a property. It also helps bring a great level of professionalism and transparency to real estate investment. This is because REIT managers must be skilled, experienced real estate finance professionals who have been approved and registered with the Securities and Exchange Commission (SEC). REITs Performance is monitored regularly by analysts, auditors and SEC. Institutional Investors also find REITs attractive as they have been shown to provide portfolio diversification benefits thereby reducing overall portfolio risk. To Real estate professionals REITs are a means of generating stable and long-term capital for real estate transactions. In addition, the ISA 2007 provides significant tax advantages for Nigerian REITS (N-REITs) which further make them a beneficial source of capital for real estate financiers and developers. It is thus interesting to note that there is only one listed REIT in the country- Union Homes Hybrid REIT.
8

A. B Odunsi 2011

Economic Background Nigeria is located in the western part of Africa, bordering the Gulf of Guinea, between Benin and Cameroun at 10 00 N, 8 00 E and has a total area of 923,768 sq km. According to July 2011 estimates, Nigeria has a population of about 155 million people and is the fifteenth largest producer of crude oil in the world at 2.2million barrels per day (CIA, 2011). It also has enormous natural gas reserves, vast agricultural lands, natural resources and a dynamic private sector. Until the mid-late 1970s, the Nigerian economy was based on agricultural and trading activities. Since then, it has become heavily dependent on earnings from oil, which account for more than half of Federal Government revenue and over 90% of export earnings. Agriculture however employs over two thirds of the population, and accounts for a third of the GDP. After gaining independence in 1960, the many years of military rule in Nigeria had devastating effects on its economy. This era was characterized by haphazard economic planning, distorted policies distorted, and undermined implementation processes as well as corruption, fraud and general mismanagement (Mudasiru, 2001). As a result, there were large fiscal deficits, decaying infrastructure, declining industrial capacity utilization, inefficient public utilities, low quality of social services, external debt overhang, and significant unemployment. Nigeria GDP Growth
25.00% 20.00% 15.00% 10.00% 5.00% 0.00%

GDP Growth
Exhibit 1.1

Source: Global Finance 2011

A. B Odunsi 2011

These significantly increased the transaction costs of business as well as eroded Nigerias competitiveness in the sectors where it traditionally possesses comparative advantages. The overall consequence has been stagnant economic performance, with GDP growth barely keeping pace with the population growth rate. Since the return to democratic governance in 1999, policies have been initiated to tackle the problems above, and lay the foundations for sustainable economic growth. The Economic blueprint tagged NEEDS- National Economic Empowerment Development Strategy cumulated in the enactment of several reforms such as privatization, monetization, deregulation, recapitalization, recertification and consolidation. Nigerian Population
200 180 160 140 120 100 80 60 40 20 0 1980 1990 2000 2010* 2015**

Population (million)

Exhibit 1.2

Source: Global Finance 2011

Furthermore, the country took a giant step in the right direction when in 2005 the Paris club forgave $18 billion of debt in exchange for $12 billion in payments amounting to $30 billion of Nigeria's total $37 billion external debt. Since 2008, the Nigerian government has shown commitment towards market-focused reforms as directed by the IMF. These include; the inflation reduction, modernization of the banking system, and resolving regional disputes over the distribution of crude oil earnings. The Nations GDP grew significantly in 2007-10 due to increased demand and global crude prices in 2010 among other reasons. It is ranked 137 out of 183 economies for the ease of doing business (World Bank, 2011) and a B+ rating (Standard &Poors, 2011)
10

A. B Odunsi 2011

Overview of Real Estate in Nigeria As in most countries, real estate continues to be a dependable source of income, a hedge against inflation and a readily marketable commodity. The sector remains one of the most high yielding and fastest growing sectors in the Nigerian economy. With the return of democratic governance, the real estate sector has experienced increased activity across the board. This is underpinned by the huge pent up demand created by insufficient supply in the face of rising demand. For instance, the housing deficit in Nigeria was estimated at between 14 17 million up from 8 million in the 1980s (Omirin and Nubi 2007). The recent rise in activity has largely been driven by the increasingly affluent population, the introduction of mortgages, increased FDI and policy reforms by Federal and State Governments. The condition of the housing sector and the supply/demand imbalance in real estate generally has led to great opportunities in the sector. However, as with other emerging economies scarcity and high cost of capital has been a major issue. Major players in the Nigerian Real Estate Market include; Property development/Investment companies, construction companies, real estate professional service providers such as; Architects, Quantity Surveyors, Land Surveyors, Estate Valuers and Town Planners. Real estate finance is provided by money deposit (commercial) banks, mortgage banks, Insurance companies and Pension funds. Key Players in the Nigerian Real Estate Finance Market

Regulators
Central Bank of Nigeria

Financial Institutions
Federal Mortgage Bank of Nigeria

Developers
Federal Housing Authority

36 State Housing Corporations

Federal Ministry of Lands, Housing and Urban Development

> 99 Primary Mortgage Institutions

36 State Ministries of Lands, Housing & Urban Development

Securities & Exchange Commission

> 800 Real Estate Developers

24 Deposit Money Banks

> 55 Insurance Companies

Exhibit 1.3

(Pison Housing company, 2008)

11

A. B Odunsi 2011

Statement of Problem According to Moss, the housing finance and indeed real estate finance system of most nations consists of three markets: the primary mortgage market, the secondary mortgage market, and the capital market. In the primary mortgage market, mortgages are created and funds are loaned directly to borrowers. In the secondary mortgage market, lenders and investors buy and sell existing mortgage loans and mortgage-backed securities (MBS). In the capital market, investors buy and sell long-term investment vehicles such as REITs, MBSs, stocks, and bonds. If the dearth of real estate finance in Nigeria must be rebuffed, challenges that are being faced by industry players in accessing the capital market with instruments such as REITs must be identified and addressed. Justification of Study REITs where first created in the United States of America by the US Congress in 1960 for the purpose of providing investors an opportunity to invest in real property as well as to create liquidity for real estate developments and mortgages. REITs have only recently surfaced in Nigeria 48 years down the line and is still yet to generate as much awareness, research and sophistication as several other investment instruments and sources of finance. This research work is undertaken as one of the premier enquiries into REITs with regard to the Nigerian context, while making inferences from other nations within Nigerias league who tend to have more developed REIT markets. Research questions 1. Are there challenges in adopting REIT Structure in financing Real Estate in Nigeria? 2. How have REITs performed in Nigeria? 3. How have REITs in other emerging markets performed? Aims and Objectives To evaluate the challenges of adopting the REIT structure as a means of financing real estate in Nigeria as well as assess the performance of REITs in the country.

12

A. B Odunsi 2011

Organisation of the Report This research work is broken down into 5 chapters. These are as follows; Chapter 1 Introduction This chapter provides a conceptual, contextual and economic background to the research work. It also outlines the research aim, objectives, questions and limitations. Chapter 2 Literature Review and Theoretical Framework The literature review discusses the major sources of real estate finance based on the two broad categories of finance, namely; debt and equity. The discourse progresses in a pyramid-like manner towards REITs with a focus on the structure, legal framework and performance of REITs in South Africa, Turkey and Nigeria. Chapter 3 Research Methodology The methods adopted in carrying out this research work, are discussed and described here. A mixture of qualitative and quantitative research methods was adopted and both primary and secondary data are secured from varied sources. This was undertaken as a blend of desk and field work. Chapter 4 Data Analysis and Interpretation In this chapter the results obtained in chapter three are interpreted. Inferences and deductions are also made. Chapter 5 Conclusion Here a final summary of the research findings is given. A review of the research objectives is done and in conclusion it states if these objectives have been met. Recommendations are made and areas of further future research are also suggested.

13

A. B Odunsi 2011

CHAPTER TWO: LITERATURE REVIEW Real Estate Finance Real estate finance can be classified into three categories; financing of land, construction finance i.e. funding of the property built on the land, and thirdly, financing the occupation /user of the property (Akaneme, 2011). All three categories often pose unique financing risks, dynamics and constraints. Real estate assets account for between 7 20 percent of GDP in most countries while housing expenses account for between 15 40 percent of the average household monthly expenditure (OPIC 2000). These show that real estate finance is a major feature in every household or organisation. Irrespective of the category of real estate finance, the two main benefits of investing in real estate are capital appreciation of the asset and rental income (Bodie et al, 2002). Real estate finance is the class of financing which is specific to the funding of real estate and its crucial for the emergence of cities, towns and organised society. Like in general finance, there are two broad categories of finance available, these are; debt and equity finance. Financing of a property or real estate project by debt or equity depends on the characteristics of asset being financed and the transaction. Real Estate Equity Finance Shareholders Equity This is the portion of a company that is financed by common and preferred shares. It is represented on a companys balance sheet as its total assets minus its total liabilities. Private Equity These are equity securities in companies that are not publicly traded on the stock exchange. Private equity positions are usually taken by private equity firms, venture capital firms and angel investors to attain wide range of goals and investment strategies. Such injected equity is usually provided to increase working capital, enable expansion and product development or to restructure the target companys operations, ownership or management. Joint Venture A joint venture is a business arrangement type in which parties agree to develop, for a finite time, a new entity and new assets by contributing equity. The parties jointly exercise control over the enterprise and consequently share revenues, expenses and assets. Joint ventures

14

A. B Odunsi 2011

create an opportunity for companies or individuals to partner without having to merge and in some cases helps the parties avoid debt. JVs are usually taxed as a partnership. In real estate, joint ventures are typically structured between a Land-owner and a Developer. The Land owner contributes his land as equity in the project while the Developer contributes his funds and expertise in carrying out development. Each partys income is proportionate to its contribution and this is usually based on pre-determined terms. In larger real estate projects, other professionals involved in the development process may also be party to joint ventures where their professional services are seen as equity contribution and rewarded upon completion of the project. Shared Ownerships Shared ownership is a contemporary method of buying stake in a property when funds are not available for an outright purchase. Shared ownerships are very popular in European countries where they are offered for sale by housing associations which are not-for-profit organisations. This is a home ownership structure where a purchaser buys a share of a property, and pays rent on the remainder which he doesnt own. The rent paid is called a specified rent which is a percentage of the fair market value on the proportion that is not owned by the purchaser. The purchase price paid will be a percentage of the market value which corresponds with the share to be received. The lease will typically contain a provision that allows the purchaser to buy additional shares at anytime during the term until he owns the 100% owns the property. This is known as stair-casing. The purchasers monthly outgoings will include repayments on any mortgage taken out, plus rent on the part of the property retained by the housing association. Fractional Ownership Fractional ownership is an investment structure where the investor owns part/fractions of the title of an asset. As such, when the asset increases in value, so does the value of the shares in the investment. Fractional ownership fragments a property into more affordable units for individuals and also matches an individual's ownership time to their actual usage time. Fractional ownership has been in practice for many years; when family and friends shared ownership of vacation property, aircrafts, sports cars and other expensive assets. The fractional property industry started in the US in the early 1990s when it was realised that
15

A. B Odunsi 2011

people did not want to out-rightly purchase whole homes in the Rocky Mountains Ski Resorts since they would only use it for just a few weeks a year. Time Share A timeshare is a type of ownership or right to the use of a property where different people own allotments of time to use the same property. This model is often applied to condominiums, homes, resort properties and camp grounds. Owners can decide to use their usage time, rent it out, give it as a gift or even donate it to a charity. Owners can also exchange their time allotments internally or externally with other allotment holders or sell their time share out-rightly. Real Estate Funds A real estate fund is a mutual fund that invests primarily in real estate to produce income and capital gains for its holders. The real estate funds industry has experience phenomenal growth both numerically and in value appreciation of funds over the last 15 years (Deloitte, 2010) Real Estate Investment Trusts Individuals can invest in REITs either by purchasing their shares directly on an open exchange or by investing in a mutual fund that specializes in public real estate. An additional benefit to investing in REITs is the fact that many are accompanied by dividend reinvestment plans (DRIPs). Among other things, REITs invest in shopping malls, office buildings, apartments, warehouses and hotels. Some REITs will invest specifically in one area of real estate - shopping malls, for example - or in one specific region, state or country. Investing in REITs is a liquid, dividend-paying means of participating in the real estate market. Real Estate Debt Finance Mortgage Loan A mortgage loan is a loan to purchase a property whereby the loan is secured by the purchased property. Mortgages are a major source of funding for the occupation of houses, offices and retail space all over the world. According to the 2001 census in England, 29% of the populace owned their homes outright while 39% financed their homes with a mortgage (UK, National Office of Statistics). Construction mortgages have also gained popularity in financing the construction of developments where the loan is secured by the constructed property.

16

A. B Odunsi 2011

Boleat (2008) postulates a strong correlation between economic development and the size of the mortgage market. Mortgage outstanding as % of GDP (2006)

Denmark UK USA Singapore Germany Hong Kong Taiwan Malaysia Thailand Korea India Nigeria Morocco 0%
4% 2% 2% 14% 23% 18% 37% 52% 60% 68% 72%

90%

86%

20%

40%

60%

80%

100%

Mortgage Outstanding as % of GDP

Exhibit 2.1

Source: Saravanan (2007) and Akinwunmi et al (2008)

Project finance Wynant (1980) defined project finance as a financing of a major independent capital investment that the sponsoring company has segregated from its assets and general purpose obligations. Furthermore, the World Bank defines project finance as the use of nonrecourse or limited-recourse financing. Project finance is non-recourse as the lenders are repaid strictly from the proceeds of the project or, in the event of failure of the project, from the value of the projects assets. Project finance is usually adopted for capital intensive projects and it predates corporate finance where permanent capital is entrusted to Managers who would decide between paying dividends and reinvestment at the end of every financial period. Apart from infrastructure and industrial projects, complex real estate projects such as shopping centres, hotels, office blocks and multi-level car-parks are often funded through project finance.
17

A. B Odunsi 2011

Sources of Real Estate Finance in Nigeria Though fragmented and scarce, there are varied sources where debt or equity capital can be raised to finance real estate transactions in Nigeria. Primary Mortgage Institutions (PMIs) These are called Mortgage Banks or Savings and Loan Associations in several parts of the world. In Nigeria, the promulgation of the Mortgage Institutions Decree No. 53 of 1989 provided the regulatory framework for the establishment and operation of PMIs by the private sector. According to the Decree PMIs are to mobilize savings from the public and grant housing loans to individuals. As at January 2011 there were 101 PMIs in Nigeria however over 50% of them are located in Lagos metropolis. Secondary Mortgage Banks The major Secondary Mortgage Bank in Nigeria is the Federal Mortgage Bank of Nigeria (FMBN) started operation in 1977. It was given the mandate to carry out the following main functions: The provision of long term credit facilities to mortgage institutions in the country, the encouragement and supervision of the activities of the mortgage institutions, provision of long term loan to individual and property developers for house building, produce saving facility and to carry out research on mortgage finance. These activities have however been marred by administrative ineptitude, political instability and uncoordinated policies (Akinwunmi 2008)

Commercial Banks These are financial institutions and intermediaries that provide transactional, savings, and money market accounts for customers. Commercial banks in Nigeria are largely retail by operation. They often only lend on short-term basis because they have to meet withdrawal requests of depositors at the shortest notice. This has not been compatible with real estate finance as real estate requires long term finance thereby limiting the success of commercial banks in this regard.

18

A. B Odunsi 2011

Credit to core private sector

Year 1 Priority sector Agriculture Solid minerals Exports Manufacturing Less preferred sectors Real estate Public utilities Transportation and Communication Finance and Insurance Government Imports and Domestic Trade Unclassified Total 2006 % 30.30 2.20 10.10 1.20 16.90 46.20 5.90 0.90 7.60 4.60 4.50 22.50 23.70 100
Exhibit 2.2

2007 % 25.90 3.20 10.70 1.40 10.40 41.20 6.20 0.60 6.80 9.40 3.70 32.90 32.90 100

2008 % 26.20 1.40 11.30 1.00 12.50 42.00 6.20 0.60 7.20 9.50 1.90 31.80 31.80 100

2009 % 24.50 1.40 12.30 0.50 10.30 45.50 8.00 0.80 8.00 12.70 3.60 12.40 30.00 100

(Central Bank of Nigeria, 2010)

Insurance companies Insurance companies play an important role as providers of capital for real estate from an equity (owner) standpoint. Insurance companies lend to PMIs or commercial banks then lend to the end borrower. Typically, Insurance companies normally specialize in large-scale projects and mortgage packages or make time-deposits. Insurance companies generate liquidity from the payment of premiums by their policyholders and since both the inflow of premiums and the outflow of claim payments can be predicted with reasonable accuracy, they are able to invest in higher yielding assets. In the US, Insurance companies have historically invested between 25 and 30% of their assets in mortgages while they have invested an average of 21% in real estate and mortgages in Nigeria.

19

A. B Odunsi 2011

Total Insurance Business Investments (N Million)

Bills Of Exchange. Cash Deposits & Hand

2006
Policy & Other Loans Real Estate & Mort. Stocks & Bonds Govt. Securities 0 40,000 80,000 120,000

2005 2004 2003 2002

Exhibit 2.3 Source:

National Insurance Commission, 2008

Pension Funds On the 25th June, 2004, the Pension Reform Act 2004 was enacted by the Nigerian government ordering every form of employment to mandatorily participate in the Contributory Pension Scheme for payment of retirement benefits of its employees. With about 26 registered PFAs in Nigeria and less than 10% of Nigerias working population signed on to the pension scheme, there are significant opportunities for growth in the countrys pension industry (BGL, 2010)

Total Pension Assets (N' billion)

2009 sept 2008 2007 2006 2005 2004 0
47 121 265 815 1072

1300

500

1000

1500

Total Pension Assets (N' billion)

Exhibit 2.4

Source: Pencom, 2010

20

A. B Odunsi 2011

The Pension Fund Administrators (PFA) collects funds from employers and employees towards their retirement. This gives them access to long term funds and put them in good position to finance real estate development. However, the Nigerian pension reform is modelled after the Chilean Pension law as such there are significant restrictions on investible assets of pension funds which include embargo on direct investment in real estate. Cooperative Societies Cooperative societies pool individual members resources from where soft loans are advanced to their members. They are popularly called Ajo in southern parts of Nigeria or Esusu in the east. Such funds are often used in purchasing land or carrying out renovation works on existing property. The Informal Sector The informal sector of an economy is classified by the extent to which the government is functionally aware of its activities (Akanji, 1998). Nubi (2000) suggests that this sector amounts to about 60% of Nigerian urban labour force. Profits of the informal sector are neither taxed nor are they captured in the national income accounts. Sources of informal real estate finance include; personal savings, family loans, individual moneylenders, informal clubs and religious societies. There are several investors who constantly lend money to real estate or any other form of business venture. These investors are individuals or groups with available funds which may range from small to large-scale, seeking mortgage ownership and equity positions in real estate. It is thus possible to raise equity capital through syndication instead of relying solely on mortgage funds Background of Real Estate Investment Trusts (REITs) A Real Estate Investment Trust is traditionally a closed-end fund created to hold real estate, mortgages or a mixture of both (Chan et al 2003). As such there are three main classes of REITs. These are: Equity REITs- The trust invests strictly in real estate and generates revenue principally from rental income and capital gains from the sale of portfolio properties. Mortgage REITs- The trust loans money for mortgages to real estate owners or purchase existing mortgages or MBS. Their revenue comes principally from interest earned on their mortgage loans.

21

A. B Odunsi 2011

Hybrid REITs- are REITs that investment in both real estate and mortgages being a combination of Equity and Mortgage REITs. REITs have transformed how real estate was traditionally financed (equity and debt) and acted as a catalyst for the integration of real estate capital markets into general capital markets (Oreagba, 2010). Prior to the creation of REITs, Investors could only purchase real estate from the real estate market and this often required a large capital outlay. However REITs allow investors to purchase units in properties on the stock market and to the tune of the amount the investor wants to invest. While REITs traditionally were closed-ended funds, modern variants of REITs allow them to be structured like operating companies whose major holdings is in real estate or mortgages. A major attraction of REITs is that it is tax exempt on the corporate level. While corporations are taxed on their income, REITs are not. The implication of this is that investors would tend to invest in REITs over a long period and only by taxed when selling their shares (Sebehela, 2007) REITs in South Africa In South Africa, there are two products that have very close resemblance to REITs as known globally. These are Property Loan Stocks (PLS) and Property Unit Trusts (PUT). They are both listed property vehicles are listed on the JSE under Financials Real Estate. Property unit trusts (PUT) are perhaps the more REIT-like of the two. A Property unit trust is a portfolio of investment grade properties which generate cash-flow from the portfolio's rental income in the short term, while the value of the units themselves increase in the longer term, as the value of the underlying properties increase. PUTs are managed by management companies, responsible both for the day-to-day operation of the properties and also the trust. There are currently six listed trusts, with a total market capitalisation of over R24-billion (APUTSA, 2011). The prices of listed PUTs are quoted on the JSE Limited (SA) and are published in the media under the "Real Estate" heading. Common features between PUTs and REITs, include the distribution of income from the property investments in the form of net rental or an interest distribution, restrictions on the type of assets that the trust invests in (typically types of property investments); guidelines on

22

A. B Odunsi 2011

the amount of income that needs to be distributed; and limitations on the level of debt on the balance sheet. A property unit trust can borrow only 30% of its total net asset value. According to APUTSA, PUTs are not regulated by a specific Act or regulatory framework but rather a combination of statutes. These include; Johannesburg Stock Exchange (JSE) Listings requirements Collective Investments Schemes Control Act No.45 of 2002 Standard Trust Deed (which is usually formed by the trustees of the trust) On the other hand, Property loan stock companies are governed by their own memorandum and articles of association. As with all other companies property loan stocks are subject to the Companies Act and the JSE regulations. A significant difference between property loan stock companies and other companies is the way its owners fund the company. Each linked unit in a property loan stock comprises part share and part debenture (loan). The debenture (loan) portion of the linked unit earns interest at a variable rate. The interest comes from net income (after expenses) which the loan stock company achieves from rental streams from the properties in which the company invests. Usually property loan stocks distribute majority of their revenue profits through debenture interest while the balance is paid out as a dividend. These distributions are regular, providing steady cash stream for investors and are tax transparent. PUTs can gear up to thirty percent of the asset value of its portfolio. PUTs must be listed on the JSE however it is not mandatory for PLSs to get listed. There are 5 PUTs and 23 PLSs listed on the JSE. In overall PUTs are more regulated than PLSs (Sebehela, 2007)
Differences between South African PLSs and PUTs Property Loan Stock Regulation Management Capital Structure Gearing Payout ratio Representative Organisation Companies Act Internal or external Linked units (Debenture linked to shares) No restrictions (Articles) No restrictions (Trust deed) Property Loan Stock Association (PLSA)
Exhibit 2.5

Property Unit Trust Financial Services Board External Participatory units Max 60% gearing 100% Association of Property Unit Trusts (APUT)

23

A. B Odunsi 2011

REITs in Turkey Real estate Investment Trusts emerged in Turkey in 1995 when the Capital Markets Board (CMB) published the Principles Communiqu pertaining to Real estate Investment Trusts. In 1996, the first REIT was established and by 2003 there were 9 REITs listed on the Istanbul stock Exchange (ISE). In 1998, the legal framework for REITs was amended and REITs were obligated to make at least 49% of their stocks public. This new law made Turkish REITs more institutional and transparent. Turkish REITs are relatively liquid due to the high ratio of float to market capitalization and the high daily transaction volume. Turkish REITs account for 1.27% of the daily turnover of the ISE which is significantly higher than US-REITs which account for only 0.01% of the daily turnover of the NYSE (Aydinoglu, 2004). However US-REITs have a much larger market capitalization than Turkish REITs. Turkish REITs must deal primarily in portfolio management. As such they must not engage in construction, operation of hotels, shopping centres, hospitals etc, and cannot provide services to individuals or organisations. They cannot engage in any form of banking, commercial, industrial, or agricultural activities. Investments in foreign investments (both real estate and capital market instruments) must not exceed 49% of the REITs portfolio value. A REIT in Turkey may secure debt up to 3 times the net asset value of its portfolio. REITs in Nigeria The Investments and Securities Act of 2007 (ISA), provided the legal framework and corporate structure for the creation of Real Estate Investment Trusts in Nigeria. This came as a result of agitations by the Nigerian Stock Exchange (NSE) and the Securities and Exchange Commission (SEC) to create products that provide diversification benefits for investors in the stock market. Section 158(1c) of the ISA 2007 provides that the Commission may approve a collective investment scheme which is administered as a real estate investment company or trust. According to the Act a REIT or REIC must have a minimum of 75% of its total assets directly invested in real estate. The level of development activity which the Trust or Company may engage in directly is pegged at 20% of its asset value while gearing is limited to 15%

24

A. B Odunsi 2011

The law also requires that REITs/REICs prepare Independent valuation reports every 2 years and also the fund manager is to prepare a quarterly performance report while the trustee is to prepare half yearly reports. A REIT is expected to provide a rating report every 2 years. Section 195(1) of the ISA 2007 permits foreign REITs to solicit investment from Nigerian Investors however Nigerian REITs must seek the approval of SEC to solicit investment in any foreign collective investment (Section 195(2), ISA 2007). Under the law, Nigerian REITs are not permitted to make investments outside Nigeria in real estate or any other asset class. Requirements for registration of Nigerian Real Estate Investment Trusts (N-REITs) are spelt out in Section 194 of the ISA 2007 and it states: A real estate investment company or trust may be registered by the commission if it: (a) is a body incorporated under the Companies and Allied Matters Act. (b) Has a capital and reserve as prescribed by the commission from time to time. (c) Carries on business as a collective investment scheme solely in properties. (d) Complies with the requirement prescribed by the Commission through its rules and regulations made from time to time. Requirements for the registration of units of N-REITs include but are not limited to a minimum underwriting commitment of 35% from issuing house as well as a minimum 60% subscription for to get SEC clearance. The REIT must have a minimum of 300 subscribers to be listed on the Nigerian Stock Exchange.

Summary: Comparison of South African, Turkish and Nigerian REITs South Africa Turkey Nigeria Name Property Unit Trusts Turkish REITs Nigerian REITs Year Started 1969 1996 2008 Number (2011) 5 13 1 Mkt. Cap. (2010) $3.4 billion $1.89 billion Regulator Johannesburg Stock Capital Markets Board Securities Exchange Exchange Commission Legal Entity Trust Joint Stock Company Trust or Company Min. Share Cap. 7.2 Million TRY Activities Portfolio and property Strictly portfolio Portfolio mgt., management management property mgt. & devt. Foreign Permitted Max. 49% of Asset in No Foreign Investments Foreign Investments Investments Debt Limit Max. 30% of NAV Up to 300% of NAV Max. 15% of NAV Dividend No Limit Minimum 20% Minimum 75% Distribution
Exhibit 2.6

25

A. B Odunsi 2011

Tax treatment at REITs level Nigeria Income Tax Tax exempt on portion distributed as dividends Taxable (40%) Capital Gains Tax Tax exempt to the extent that they are distributed as dividends Tax exempt to the extent that they are distributed as dividends Tax exempt
Exhibit 2.7

Withholding Tax Taxable

South Africa

Tax exempt

Turkey

Tax exempt

Tax exempt

Tax treatment at Shareholders level Corporate shareholder Nigeria South Africa Turkey Discounted tax 12.5% Taxable (20%) Individual shareholder Discounted tax 0 -10% 50% of income subject to tax (15 -35%)
Exhibit 2.8

Withholding Tax Taxable Taxable N/A

Structure of REITs in Nigeria

Unit Holders - Institutional Investors - Individual Investors

Investments in REITs units

Debt Finance
Principal and Interest

Acts on Behalf of Unit holders

REIT Fund Manager

REIT
Ownership of Assets Net Property Income

Trustees

Property Management Services

Property Manager Commercial Properties

Exhibit 2.9 (Goldman Assets, Nigeria Stock Exchange, 2009)

26

A. B Odunsi 2011

Union Homes Hybrid REIT Union Homes Hybrid REIT was the first and only REIT to be created in Nigeria as at August 2011. The initial public offer was made by Union Homes Savings and Loans Plc on August 19, 2008 and Closed September 25, 2008. The company offered for subscription 970,873,787 Units at an issue price of N51.50 per unit. Investors were required to pay the full amount of the issue price on application. The REIT was constituted under a Trust Deed as a closed-ended unit trust scheme with aims to achieve long-term capital appreciation of assets by investing in a portfolio of both real estate and mortgage assets. In total, a minimum of 90% of its assets will be invested in real estate and real estate related assets and a maximum of 10% will be invested in quality money market instruments. Financial Projections As at the time of offer, the financial projects of the REIT were as follows;
YEAR I N '000 GROSS INCOME LESS EXPENSES NET INCOME PROVISION FOR TAX DISTRIBUTION @ 90% UNDISTRIBUTED INCOME EARNINGS PER UNIT (EPU) DISTRIBUTIONS PER UNIT (DPU) 3,324,178 878,550 2,445,628 782,601 1, 1,496,724 166,303 171K 154K YEAR II N '000 6,345,579 1,036,365 5,309,214 698,948 3,249,239 361,027 372K 335K YEAR III N '000 6,770,149 1,044,182 5,725,967 1,832,310 3,504,291 389,366 401K 361K

Investment Projections The REIT projected to be geared up to 15% of the value of the real estate assets. A maximum of 50% of the portfolio's assets at market value was projected to be invested in any one real estate sub-sector with Investments ranging from N200 million to N5 billion in size. The fund manager projected at allocating approximately 70% of the REIT's portfolio to core investments, which are generally lower risk (already developed properties with at least 80% occupancy) while approximately 30% of its assets will be injected in value-added properties, which are higher-yield/risk investments.

27

A. B Odunsi 2011

Performance of Union Homes Hybrid REIT According to the abridged time-table at the time of offer, the REIT was projected to be listed by Mid-December 2008. However it wasn't until Friday 2nd July, 2010 that Union Homes listed 250,019,781 units of 50 Naira each at N51.50 per share at the Lagos floor of the Nigerian Stock Exchange (NSE). This shows that only about 26% of the units allotted were subscribed for. This includes the 10% mandatory subscription of the total fund size by the REITs sponsor as mandated by the SEC regulations guiding collective investment schemes. As such it can be inferred that the general public subscribed to a maximum of 16% of the REIT.

28

A. B Odunsi 2011

CHAPTER THREE: RESEARCH METHODOLOGY Introduction The previous chapter reviewed several concepts and literature within the context of this research endeavour. Particularly on types and sources of real estate finance as well as REITs in Nigeria and two other emerging economies; South Africa and Turkey. This chapter outlines the research approach, methodology and design adopted to answer the research questions posed. Research Approaches There is no one-size-fits-all approach to carrying out a research work. It has often been stated that the paradigm adopted by a researcher shapes the way he perceives the world (Lakatos 1970, Feyeraband 1978). The choice of approach is determined by the type of research questions posed and the type of answers these questions require. (Denzin & Lincoln 1994; Aghaunor et al, 2002). As stated earlier, the research questions are as follows; 4. Are there challenges in adopting REIT Structure in financing Real Estate in Nigeria? 5. How have REITs performed in Nigeria? 6. How have REITs in other emerging markets performed? Different approaches have been taken to answer the three questions enumerated above. Research is largely a process of theory testing and in social and behavioural sciences this could be exploratory of confirmatory research (Onwuegbuzie and Tedlie 2003). Exploratory research is conducted when a problem has not been clearly defined or when its scope is not yet clear. It allows for familiarization and progressive elaboration of the problem or concept to be studied. Exploratory research helps determine the best research design, data collection and selection method. An explorative investigation is appropriate when a research problem is unstructured and difficult to de-limit (Aghaunor et al 2006). Confirmatory research is conducted where there is a clear understanding of a problem. There is a theory and the objective of the research is to find out if the theory is supported by the facts. The main objective of exploratory research is theory initiation and theory building while confirmatory research focuses on theory testing. .

29

A. B Odunsi 2011

A research may however be classified on a gamut between exploratory and confirmatory research. This research can be described as both exploratory and confirmatory but largely exploratory. It explores into the performance of REITs and the challenges of adopting REIT structure, partially confirming that there may be challenges since there is only one REIT in the country. Any research can be classified as quantitative, qualitative or mixed method. Qualitative Research Approach Qualitative research entails an in-depth enquiry into human behaviour and the reasons that govern such behavior. The qualitative method investigates the why and how of decision making, not just what, where, when. The qualitative research paradigm has also been described as a constructivist, naturalistic, interpretative, post-positivist or post-modern perspective approach to research (Lincoln & Guba, 1985) Creswell (2003) described it as an enquiry process of comprehending a social or human problem based on building a complex holistic picture formed with words, reporting detailed views of informants and conduced in a natural setting. In qualitative research approach; theory and hypothesis are therefore not established prior to the research. The research questions may change and be refined as the enquirer learns what question to ask and to whom. Quantitative Research Approach Quantitative research refers to the systematic and empirical investigation of social problems through the use of statistical, mathematical or computational techniques. The quantitative research paradigm is also known as the traditional, positivist or empiricist research paradigm (Creswell 2003). This method uses numerals and empirical data to describe trends, behaviour or opinions of a population by studying a sample of that population. Creswell (2003 and 1994) identifies some distinct characteristics of qualitative approach as follows; Truthfulness or reality exists in the world and can be objectively and quantitatively measured, The researcher should remain independent of that being researched to ensure an objective assessment of the situation,

30

A. B Odunsi 2011

A deductive form of reasoning or logic is adopted wherein theories and hypothesis are tested in cause-and-effect order. Concepts, variables and hypothesis are chosen prior to commencement of the study and remain fixed all through. Mixed Research The mixed methods approach is also referred to as the integrating, synthesis, or multimethodology approach. This is because to a mixture of the quantitative and qualitative research methods in one (Tashakkori and Teddlie 1998). This methodology is appropriate in research works where it is possible to collect both quantitative and qualitative data, deeper and more appropriate understanding of the phenomenon being researched (Creswell, 2003). It is considered as a research design and method of inquiry that dictates the direction of the collection and data analysis whereby the collection and analysis of data has a mix of quantitative and qualitative research processes (Creswell and Plano Clark 2007). The mixed method of research is the approach adopted in this work. In answering the 3 research questions, different qualitative and quantitative methods will be adopted as shown in the table below; Note that; Q= Questionnaire, S=Semi-structured interview, L= Literature Review, D=Data Analysis

Research Question 1 Are there challenges in adopting REIT Structure in financing Real Estate in Nigeria? 2 How have REITs performed in Nigeria?

Description L- Detailed literature review of Real estate finance and REITs in Nigeria Q- Questionnaires to provide information and statistics for analysis S- Questions asked during semi-structured interviews will provide broader views to challenges and issues with REITs in Nigeria D- Data analysis of findings L- Detailed literature review on the performance and issues of the only existing and prospective REITs in Nigeria Q- Questionnaires to provide information and

31

A. B Odunsi 2011

statistics for analysis S- Questions asked during semi-structured interviews will provide broader views D- Data analysis of findings 3 How have REITs in other emerging markets performed? Research Design Research designs are procedures for collecting, analyzing, interpreting and reporting data in a research work. It is important to carefully select the research design to be adopted because it steers the entire process and determines the reasoning pattern for interpretation of findings (Creswell and Plano Clark 2007). Selective Sample Survey As with most research endeavours, the population size of this research is too large and practically impossible to be tested or assessed. This is due to various factors including limitations in cost, time and manpower. The population size is not only large but it is also quite daunting to determine its size in precise terms, as the question of who can adopt REIT structure? is posed. For the purpose of this research, it is assumed that Mortgage banks, Venture Capitalists and Property development and Investment companies in Nigeria make up the entire population. This is because these are the according to the laws these are the sort of companies that may ordinarily take up the REIT structure. Commercial banks are not included as the Central Bank of Nigerias regulations prevents banks from taking large equity positions in real estate investment which on the converse is the requirement to set up a REIT according to the ISA 2007. As such a random sampling technique is adopted. A blend of mortgage banks, venture capitalists and property development and investment companies are examined. Questionnaires were sent to highest-level decision-makers in these companies and their responses aided in answering research questions 1 and 2. Prior to administering questionnaires, structured interviews were carried out with a few of these professionals and L- Detailed literature review on the framework, structure and performance of benchmark REITs in 2 emerging economies, namely; South Africa and Turkey D- Data analysis of findings
Exhibit 3.1

32

A. B Odunsi 2011

these gave valuable insight into industry perceptions and these were then use to generate content for the questionnaires. Performance Analysis There are several measures available under the purview of corporate finance in measuring the performance of companies or businesses. With available information on projections and actual financials; variances, earnings per share, net asset value and liquidity ratios will be calculated. VAR and VEC Models A Vector Auto-regression Models (VAR) describes the evolution of a set of variables over the sample period as a linear function of only their past evolution. A VAR has more than one dependent variable and can be considered a kind of hybrid between the uni-variate time series models and the simultaneousequation models (Brooks, 2010). A vector error correction model adds error correction features to a multi-factor model such as a vector auto regression model. This is done by creating a dynamical system where the characteristics are deviation of the current state from its long-run relationship will be fed into its short-run dynamics. All multi-variable estimation problems require the researcher to address the identification problem. With other regresion models, this required solving a sophisticated linear algebra problem. The difficulty of this goes up geometrically with the size of the model in question. VARs still require that the identification issue be addressed, but in a form that is much easier to tackle. Limitations of the Study 1. Due to time constraints, a small sample size of 20 real estate finance and mortgage institutions as well as real estate investment companies were administered questionnaires. 2. The financial statements for the only REIT in Nigeria- Union Homes Hybrid REIT were not available; as such the necessary performance analysis could not be carried out. 3. Only two comparable countries (Turkey and South Africa) were assessed. This was due largely to the lack of availability of information on other emerging economies that were under consideration.

33

A. B Odunsi 2011

CHAPTER FOUR: DATA ANALYSIS Selective Sample Survey The survey was sent out electronically to over 40 participants who are professionals in real estate and real estate finance fields. However, within the time-frame available, 20 un-biased responses were collected and analyzed. In comparison to the entire potential population, this may be quite little, however, the selective sample approach that was adopted allowed for a proper representation of the different classes of responsdents relative to the population. As such majority of the respondents were property development companies (70%) and the lower limit were commercial banks (5%). A consideration is that there are just 25 commercial banks in nigeria and over 800 property deleopment companies in Nigeria (Pison Housing Company, 2008). Type of companies surveyed
Commercial Bank, 5%

Mortgage Bank, 20%

Property Devt. /Inv. Company, 70%

Venture Capital, 5%

Exhibit 4.1

The respondent target were decision makers in companies that have the business inclination and structure to adopt REITs status. For the pupose of this research, these were assummed to be Property development/invesment companies, mortgage banks, commercial banks and venture capital firms. 50% of respondents were the Heads of their businesses while 35% were also in top management.

Cadre of Respondents MD/CEO Senior Management/Partner Middle Management Other

Exhibit 4.2

50% 35% 10% 5%

34

A. B Odunsi 2011

Sources of Finance The respondents provided information on how their companies generate funding for its real estate developments, mortgages or both. 30% of respondents only use one source of funding, 15% use two sources while 60% use three or more. In all 78% of the respondents use debt, 44% use directors equity, 39% adopt joint ventures, 28% use funds from private equity. However, non of the respondents use the REIT structure to raise capital for its business. Respondents Sources of Finance

REIT Other businesses Private Equity Joint Venture Public Listing Debt/Loans Other Shareholders Equity Directors Equity 0% 20% 40% 60% 80% 100%

Sources of finance
Exhibit 4.3

The REIT Structure While non of the respondents is currently using the REIT structure, 58% of respondents are considering using it as a means of raising capital for real estate. 42% of the 19 respondents to this question are not considering REITs.

Currently considering adopting REIT structure? Yes No

Exhibit 4.4

58% 42%

Of the respondents that are currently considering adopting REITs, 80% are encountering challenges adopting the REIT structure. 50% of the mortgage banks represented, 100% of

35

A. B Odunsi 2011

commercial banks and 64% of property development/investment companies are having challenges adopting REIT structure. None of the Venture Capital firms surveyed are considering REITs.

Encountering challenges Yes No

Exhibit 4.5

80% 20%

From this simple survey, the major challenge that firms are facing with respect to adopting the REIT structure is the poor capital market condition. However, limited expertise, high conversion costs, limited knowledge of REITs Nigeria and stringent conversion requirements are major concerns to professionals. Challenges encountered in adopting REIT Structure in Nigeria

Legal framework issues Poor capital market conditions Timing Stringent conversion requirements High conversion costs Limited knowledge of REITs Poor Investor confidence Limited Expertise 0% 20% 40% 60% 80%

Challenges Encountered
Exhibit 4.6

75% of respondents claim that their companies will be adopting the REIT structure in future while 25% are undecided and only 5% dont think the will become a REIT. These figures show a high level of appreciation for REITs and a potential sprout once all challenges are sorted out, especially in the event of more favourable capital market conditions.

36

A. B Odunsi 2011

Considering adopting REITs in future? Yes No Undecided

Exhibit 4.7

70% 5% 25%

Performance Analysis of Union Homes Hybrid REIT While the forecast figures of the Union Homes REIT are readily available, it was impossible within the period of research to secure the financial statements for Union Homes Hybrid REIT. This created a major limitation to this study. However, it is clear that the REIT must have faced several problems as it was scheduled to be listed by 16th December, 2008 but only got listed 5th July, 2010. Also, at the time of listing, only 250,019,781 units were listed as against the 970,873,787 Units offered for subscription. This represents only 26% of the units allotted and it includes the mandatory 10% subscription of the total fund size by the REITs sponsor as stipulated by SEC. These poor figures give indicators into the potential performance of the REIT considering that all the capital expected to be raised was not secured. 3-Year Financial Projects of Union Homes Hybrid REIT
YEAR I N '000 GROSS INCOME LESS EXPENSES NET INCOME PROVISION FOR TAX DISTRIBUTION @ 90% UNDISTRIBUTED INCOME EARNINGS PER UNIT (EPU) DISTRIBUTIONS PER UNIT (DPU) 3,324,178 878,550 2,445,628 782,601 1, 1,496,724 166,303 171K 154K YEAR II N '000 6,345,579 1,036,365 5,309,214 698,948 3,249,239 361,027 372K 335K YEAR III N '000 6,770,149 1,044,182 5,725,967 1,832,310 3,504,291 389,366 401K 361K

Exhibit 4.8

At the time of offer, the financial projects of Union Homes Hybrid REIT were very commendable and promising; however the prevailing situation may have prevented the realisation of these aims.

37

A. B Odunsi 2011

Financial Summary of Union Homes Savings and Loans Plc

2009 N'M GROSS EARNING PROFIT BEFORE TAX TAXATION PROFIT/LOSS AFTER TAX 4,402.00 -1,315.00 -353.94 -1,669.00 2008 N'M 6,510.00 -1,916.00 - 329.36 - 2,245.00 % CHANGE -32.28% -31.37% 7.46% -25.66%

BALANCE SHEET INFORMATION FIXED ASSETS STOCK TRADE DEBTORS CASH AND BANK BALANCE OTHER DEBIT BALANCES TRADE CREDITORS OTHER CREDIT BALANCES NET ASSETS 3,869.00 73.85 17.15 185.95 26,948.00 37,168.00 4,954.00 5,708.00
Exhibit 4.9

2,753.00 5,273.00 16.07 325.53 60,637.00 53,223.00 24,184.00 7,215.00

40.54% -98.60% 6.74% -42.88% -55.56% -30.17% -79.52% -20.89%

As earlier stated, the actual financial statements of the REIT were not secured, however the performance of Union Homes Savings and Loans Plc, the fund manager and sponsor were secured. This is shown in Exhibit 4.9 and clearly shows a situation of underperformance by the parent company to the REIT. Vector Auto-Regression Model E-views statistical and econometrics software was utilized in producing model estimations , descriptive statistics and other econometric tests on rleveant data for Nigeria, South Africa and Turkey. Due to data availability limitations, VAR analysis was carried out only on Turkish and South African REIT returns. Data Used Time series data was obtained from bloomberg on two macro variables (Inflation- CPI and Interest rates) of Nigeria, South Africa and Turkey. GPR 250 REIT indices for South Africa and Turkey were also obtained which are representative of REIT prices in the countries. REIT Index for Nigeria was not available.

38

A. B Odunsi 2011

Definition of variables and their data sources

Source Nigeria CPI S/Africa CPI Turkey CPI Nigeria Interest rate S/Africa Interest rate Turkey Interest rate Turkey Unemployment S/Africa REIT Index Turkey REIT Index IMF IMF IMF IMF IMF IMF IMF GPR GPR Period 2005:2011Q2 2000:2011Q2 2006:2011Q2 2005:2011Q2 2000:2011Q2 2006:2011Q2 2006:2011Q1 2005:2011Q2 2006:2011Q2
Exhibit 4.10

Frequency Monthly Monthly Monthly Monthly Monthly Monthly Monthly Monthly Monthly

Observations 78 134 66 78 134 66 64 134 66

Similarities and Correlation Nigeria, South Africa and Turkey are all emerging economies with B, BBB and B sovereign ratings respectively. (EIU, 2011). Inflation rates in all three countries are highly positively correlated (Average, 0.96) while interest rates are highly correlated between South Africa and Turkey (0.807) but low between Nigeria and South Africa (0.342). Inflation: Nigeria, South Africa and Turkey (2006:2011Q2)
180 170 160 150 140 130 120 110 100 I II III IV 2006 I II III IV 2007 NIG_CPI I II III IV 2008 SA_CPI I II III IV 2009 I II III IV 2010 TURK_CPI I II III 2011

Exhibit 4.11

Inflation Rates: Correlation

Nigeria Nigeria South Africa Turkey 1 0.960239977 0.975337085
Exhibit 4.12

South Africa 0.960239977 1 0.987826171

Turkey 0.975337085 0.987826171 1

39

A. B Odunsi 2011

Interest Rates: Nigeria, South Africa and Turkey (2006:2011Q2)

28

24

20

16

12

4 I II III IV 2006 I II III IV 2007 I II III IV 2008 I II III IV 2009 I II III IV 2010 I II III 2011

NIG_INT_RT SA_INT_RT TURK_INT_RT

Exhibit 4.13

Interest Rates: Correlation

Nigeria Nigeria South Africa Turkey 1 0.342652 0.632902
Exhibit 4.14

South Africa 0.342652 1 0.807078

Turkey 0.632902 0.807078 1

REIT Index: South Africa and Turkey (2006:2011Q2)

900 800 700 600 500 400 300 200 100 0 I II III IV 2006 I II III IV 2007 I II III IV 2008 I II III IV 2009 I II III IV 2010 I II III 2011

SA_REIT_IND

TURK_REIT_IND

Exhibit 4.15

40

A. B Odunsi 2011

REIT Index: Correlation

South Africa South Africa Turkey 1 0.330194678
Exhibit 4.16

Turkey 0.330194678 1

Descriptive Statistics The REIT returns for South Africa and Turkey were compared utilizing some descriptive statistics to evaluate the returns distribution and their characteristics. REIT returns in both Turkey and South Africa have relatively low standard deviations which mean REIT returns have a low variation or dispersion from the expected average. It has a high kurtosis which is a measure of the "peakedness" of the probability distribution of a real valued random variable, in this case REIT returns.

Probability Distribution of South Africa REIT Returns

24 20 16 12 8 4 0 -0.2 -0.1 0.0 0.1 0.2 Series: REIT_RETURNS Sample 2000M03 2011M05 Observations 134 Mean Median Maximum Minimum Std. Dev. Skewness Kurtosis Jarque-Bera Probability 0.015833 0.027094 0.229112 -0.257320 0.083241 -0.755545 4.648141 27.91533 0.000001

Exhibit 4.17

41

A. B Odunsi 2011

Probability Distribution of Turkish REIT Returns

14 12 10 8 6 4 2 0 -0.6 -0.4 -0.2 0.0 0.2

Series: REIT_DESCRIPTIVE_STATS Sample 2005M12 2011M07 Observations 67 Mean Median Maximum Minimum Std. Dev. Skewness Kurtosis Jarque-Bera Probability -0.004408 0.014006 0.310199 -0.608993 0.153880 -1.246772 6.038080 43.12480 0.000000

Exhibit 4.18

VAR Analysis: Co-integration Tests In order to appropriately adopt a using a vector auto-regression model in estimating the impacts of CPI and interest rates on REIT returns, a co-integration test must be done to ensure the variables are not co-integrated (i.e. there is a long-run relationship between the variables), otherwise a vector error correction model (VECM) may be more appropriate. In doing this, the first difference of the REIT index, interest rate and CPI for both South Africa and Turkey was estimated. Co-integration Tests
Unrestricted Co-integration Rank Test (Trace) Hypothesized Trace No. of CE(s) None At most 1 At most 2 Eigenvalue 0.093354 0.038521 7.65E-08 Statistic 18.12176 5.185285 1.01E-05 0.05 Critical Value 29.79707 15.49471 3.841466 Probability 0.5571 0.7888 0.9992

Unrestricted Co-integration Rank Test (Maximum Eigenvalue) Hypothesized Max-Eigen 0.05 No. of CE(s) None At most 1 At most 2 Eigenvalue 0.093354 0.038521 7.65E-08 Statistic 12.93648 5.185274 1.01E-05
Exhibit 4.19

Critical Value 21.13162 14.2646 3.841466

Probability 0.4581 0.7183 0.9992

42

A. B Odunsi 2011

In both cases, at 0.05 significance level the Trace and Maximum eigenvalue tests show that there is no co-integration as shown in the results above. As such the VAR approach is adopted to examine the relationship between REITs, interest rates and inflation (CPI) in both South Africa and Turkey. VAR Analysis: Lag Length Selection A critical element in the specification of VAR models is the determination of the lag length of the VAR. Braun and Mittnik (1993) showed that estimates of a VAR whose lag length differs from the true lag length are inconsistent as are the impulse response functions and variance decompositions derived from the estimated VAR. Ltkepohl (1993) also indicates that overfitting causes an increase in the mean-square forecast errors of the VAR and under-fitting the lag length often generates auto-correlated errors. Hafer and Sheehan (1989) find that the accuracy of forecasts from VAR models varies substantially for alternative lag lengths. Researchers and statistics have often selected an appropriate lag by using an explicit statistical criterion such as the Akaike Information Criterion (AIC) or Schwarz Information Criterion (SIC). In this research work, the AIC was adopted and the optimal lag length estimated was 4 and 1 for South Africa and Turkey respectively. See Appendix ** for estimates. VAR Analysis: Granger Causality Tests Rather than grilling through the VAR results obtained, the much more direct Granger causality test was used to investigate the influence of both interest rates and inflation on REIT prices in both countries. Granger causality tests are used to test if changes in a variable will impact on changes in other variables. Estimations for South Africa show that neither changes in interest rate nor inflation influence changes in REIT prices. On the other hand, REITs in Turkey are sensitive to interest rate risks, but not inflation. Impulse Response Functions Impulse Response functions estimate how typical shocks will affect a variable through time. As such, impact of unexpected changes to interest rates and inflation on REIT prices was investigated. For South Africa, unexpected change in interest rates would cause REIT prices to rise temporarily (for about 6 months) and then over time (7-24 months), it has a negative impact on prices. In Turkey, the effect is persistently negative on REIT prices. See Exhibit 4.20 below
43

A. B Odunsi 2011

South African REIT Impulse Response

Response of LOG_SA_REIT_INDEX to LOG_INTEREST_RATE
.010 .005 .000 -.005 -.010 -.015 -.020 2 4 6 8 10 12 14 16 18 20 22 24

Response of LOG_SA_REIT_INDEX to LOG_CPI

.010 .005 .000 -.005 -.010 -.015 -.020 2 4 6 8 10 12 14 16 18 20 22 24

Exhibit 4.20

44

A. B Odunsi 2011

Turkish REIT Impulse Response

Response of LOG_TURKEY_REIT_INDEX to LOG_INTEREST_RATE
.00

-.01

-.02

-.03

-.04

-.05 2 4 6 8 10 12 14 16 18 20 22 24

Response of LOG_TURKEY_REIT_INDEX to LOG_CPI

.00

-.01

-.02

-.03

-.04

-.05 2 4 6 8 10 12 14 16 18 20 22 24

Exhibit 4.21

VAR Decompositions The variance decomposition methodology show which shocks are most important in explaining a variable through time. This tool was adopted in examining what proportion of unexpected changes in REIT prices is caused by shocks to the interest rates and inflation. In South Africa, over 12 months, 99% of unexpected changes are caused by shocks to REITs. In Turkey, the story is different; 83% is caused by its own shocks while 15% is caused by interest rate shocks.

45

A. B Odunsi 2011

South Africa: VAR Decomposition

Period 1 2 3 4 5 6 7 8 9 10 11 12 S.E. 0.085201 0.126704 0.151801 0.170621 0.185974 0.198623 0.209211 0.21818 0.225916 0.232727 0.238789 0.244248 LOG_SA_REIT_INDEX 100 99.95958 99.82776 99.81227 99.82193 99.83877 99.8347 99.80383 99.73023 99.60353 99.42598 99.19445
Exhibit 4.22

LOG_INT_RATE 0 0.000245 0.061973 0.054025 0.046073 0.041076 0.055978 0.095644 0.175551 0.306515 0.486519 0.71907

LOG_CPI 0 0.040178 0.110269 0.133704 0.131996 0.120151 0.109325 0.100525 0.094216 0.089957 0.087504 0.086479

Turkey: VAR Decomposition

Period 1 2 3 4 5 6 7 8 9 10 11 12 S.E. 0.150629 0.197829 0.226585 0.246253 0.260629 0.27165 0.280418 0.287594 0.293595 0.298692 0.303068 0.306851 LOG_TURK_REIT_INDEX 100 99.552 98.59753 97.24162 95.59794 93.77604 91.87227 89.96506 88.11372 86.35964 84.729 83.23578
Exhibit 4.23

LOG_INT_RATE 0 0.405005 1.270388 2.503508 4.003199 5.67131 7.420909 9.180728 10.89641 12.5295 14.05525 15.45984

LOG_CPI 0 0.042994 0.13208 0.254874 0.398857 0.552651 0.706822 0.854208 0.989876 1.110853 1.215751 1.304376

Interpretation of Results From estimations, REITs in South Africa show response to neither changes in interest rates nor inflation. Assuming that inflation and interest rates are significant and sufficient proxies for a countries macroeconomic situation, one may infer that South African REITs are solid defensive stocks. Also, sudden changes in interest rates have positive short run effects on REIT prices but grow adverse in the long run. As for Turkish REITs, they showed sensitivity to interest rate risks but not to inflation while unexpected changes in rates create negative effects on REIT prices. This is supported by Erol and Tirtiroglu (2004) who showed with empirical results that Turkish REITs generally provide a better hedge against both actual and expected inflation than do the other common stocks listed on the Istanbul stock exchange.
46

A. B Odunsi 2011

The VAR decomposition showed that 83% of shocks are caused by shocks of the REITs themselves while 15% is caused by interest rate shocks. Considering that both independent variables need to be causative to infer a general macroeconomic influence, this cannot be inferred. This situation may have more to do with the structure of Turkish REITs. For instance, this may be due to a situation where Turkish REITs are heavily invested in mortgage products. However this may not be so as Aydinoglu (2004) reports that a major obstacle in Turkish real estate market is the lack of a mortgage system and long-term financing for real estate.

47

A. B Odunsi 2011

CHAPTER FIVE: CONCLUSION Summary This research work has produced one of the premier and first level enquiries into REITs in Nigeria. Considering that legislation has been passed supporting and detailing the structure for the existence of Nigerian REITs since 2008, this investigation coming 3 years down the line provides some valid queries on the level of acceptance this investment instrument has received. Real estate finance is well identified to be categorized as financing of land, construction finance i.e. funding of the property built on the land, and thirdly, financing the occupation or user of the property (Akaneme, 2011). However, this work reviews literature on real estate finance based on the two major classes of finance, namely; debt and equity. As such previous works and concepts of debt and equity types of real estate finance were examined as well as their various sources in the subject country. This then culminated into a deeper review into REITs, particularly on the structure and behaviour of REITs in Nigeria and two other emerging economies; South Africa and Turkey. A mixed research method was adopted, which means the exploration had both quantitative and qualitative dimensions to it in order to attain a deeper and more appropriate understanding of the phenomenon being researched (Creswell, 2003). On the quantitative side; a selective sample survey was electronically conducted on firms most likely to adopt or have adopted the REIT structure in financing their real estate, mortgage or hybrid (a mix of both) transactions. These were identified within the Nigerian context to be Mortgage banks, property development/investment companies and venture capitalists. From an un-biased and qualified sample of 20, the following was determined: Summary of Survey findings
All Respondents are Real estate/Mortgage Professionals None of the Respondents have adopted REITs Only 1 REIT exists in Nigeria 30% of respondents only use one source of funding, others mix 58% of Respondents are considering adopting REIT structure 80% considering REIT structure are having challenges adopting it Poor capital conditions is the major challenge
Exhibit 5.1

48

A. B Odunsi 2011

Ranking of Challenges to adopting REIT structure in Nigeria

Poor Capital market conditions Limited Expertise High conversion costs Limited knowledge of REITs Stingent conversion requirements Poor investor confidence Legal framework issues Timing

1st 2nd 3rd 4th 5th 6th 7th 8th

Exhibit 5.2

While the intention of the researcher was to carry out some performance analysis on the only REIT in Nigeria- Union Homes Hybrid REIT, the financial forecasts of the REIT were secured however the actual financials were not available as at the time of this undertaken. This impaired a full performance measurement, however considering that only 26% of the ed units offered for subscription were subscribed for and no more than 16% of this was by the general public. Also the REIT has not been traded on the floor of the exchange since its l listing. These subtly hint at the possibility of underperformance by the REIT especially considering that it only secured about a quarter of the capital projected to be raised. Adopting a vector auto-regression model, the performance of REITs in two other emerging regression economies (South Africa and Turkey) were assessed using two macroeconomic variables as proxies for economic conditions. SA REITs showed no response to neither changes in interest rates or inflation, thereby generating a possible inference that So South African REITs are solid defensive stocks. On the other hand, Turkish REITs showed sensitivity to interest rate risks but not to inflation. In the short run sudden changes in interest rates cause SA REIT prices to rise temporarily but after about 6 months it begins to have negative effects on months REIT prices. Interest rate shocks show a constant negative effect on Turkish REIT prices further confirm the huge influence of interest rates on them them. Finally, the VAR decomposition showed that majority shocks to REIT prices are caused by shocks of the REITs themselves in both Turkey and SA however in the case of Turkey 15% of shocks are caused by interest rate shocks. Considering that both independent variables shocks. need to be causative to infer a general macroeconomic influence, this cannot be inferred.
49

A. B Odunsi 2011

Summary of VAR Analysis findings

Nigeria, South Africa (SA) and Turkey are emerging economies Inflation rates in all 3 countries are highly positively correlated Interest rates are highly correlated between SA and Turkey but low between Nigeria and SA Turkish and South African REITs have relatively low standard deviations SA REITs prices are neither influenced by interest rates nor inflation Turkish REITs are sensitive to interest rate risks but not inflation. Interest rate shocks cause SA REIT prices to rise temporarily but is adverse over time Interest rate shocks are persistently negative on Turkish REIT prices.
Exhibit 5.3

Conclusion and Recommendations This research endeavour has been able to identify that a lot of Nigeria real estate and mortgage professionals are considering adopting the REIT structure in financing their businesses, as at present majority of them adopt more than one source of funding depending on their different corporate finance outlooks. However, only one mortgage bank has adopted this structure due to challenges that are being faced. According to the research findings, the major challenge is the poor condition of the Nigerian capital market. Also, limited expertise on REIT structuring and the high conversion costs are some of the fears of professionals. The goes to show that real estate and mortgage players being rationale and risk averse as an average investor want to ensure the structure, market and expertise level is tested before they launch out. While the first challenge may be quite daunting for regulators such as the Securities and Exchange Commission (SEC) and the Nigerian Stock Exchange (NSE) to ameliorate, they have major roles to play in improving expertise on REITs as well as reduction in conversion costs. In the UK, the government is proposing scraping the 2% conversion cost on total asset value amongst other efforts aimed at encouraging the creation of REITs (CBRE, 2011). Similar measures need to be taken by Nigerian regulators to incubate the success of REITs in the country. As seen from the VAR decomposition of South African and Turkish REITs, majority of the shocks to REITs are caused by the REITs themselves and not macroeconomic factors or indicators. This gives an insight into the potential behaviour of Nigerian REITs being highly

50

A. B Odunsi 2011

correlated with these economies. While this is not an assertive position, it forms a basis of investigations on N-REITs when they begin to be traded in huge volumes in the wake of more favourable market conditions. Areas for further Study In further assessing the performance of REITs in other emerging economies, the influences and impulse response functions of REITs to the All-share-Index may be determined. Such estimation may potentially show presence of co-integration as it is expected for REITs to have long run relationships with the all share index. However, in such a case a vector error correction model may be utilized. It is also the believe of the researcher that further studies may have access to data on REITs in Nigeria and this will open up a wide spectrum of research that may be carried out ranging from the diversification benefits of Nigerian REITs in a portfolio to assessments of their performance in aiding to reduce the real estate finance deficit in the country, amongst others.

51

A. B Odunsi 2011

REFERENCES Adedamola, O.O., Ajayi, C.A., Olaleye, A and Fagbenle, O.I. (2011). An Analysis of Clients Satisfaction with Mortgage Valuation Reports in Nigeria. International Journal of Marketing Studies. 3 (2) p. 160-168. Ahmad, M.K. (2008). Pension Reform Process in Nigeria: Transition From Defined Benefits to Defined Contribution. IOPS Workshop on Pension Supervision. February 2008. Dakar. National Pension Commission. Aktan, B. and Ozturk, M. (2009). Empirical Examination of REITs in Turkey: an Emerging Markets Perspective. Journal of Property Investment and Finance. 27(4) p. 373-403. Aluko, B.T. (2007). Implication of the Current Trend in Mortgage Valuation Practice in Nigeria. International Journal of Strategic Property Management. 11 p. 17-31. Aluko, B.T. and Olaleye, A. (2005). Utilization and Securitization of Property Investment Implications for Future Valuation. Journal of Business Economics and Management. 6(3) p. 125-134. Amaniampong, E.A. (2006). Residential Development and Borrowings in Ghana: A Challenge for Banks and Private Estate Developers. Master of Science Thesis No. 334. Stockholm: Royal Institute of Technology. Asset and Resources Management Company Limited (2011). Arm Daily Market Commentary 25th August 2011. Nigeria: Asset and Resources Management Company Limited. Bers, M. and Springer, T.M. (n.d.) Economies of Scale for Real Estate Investment Trusts. BGL (2010). BGL Pension Report: Situating Nigeria in the Global Pension Industy. Nigeria: Bgl Plc. Brueggeman, W.B., Chen, A.H. and Thibodeau, T.G. (1984). Real Estate Investment Funds: Performance and Portfolio Considerations. AREUEA Journal. 12(3) p. 333-354. Business Day (2006). Property Unit Trust Body Argues For Reits Structure. Wednesday 23 August. p.10. Comer, B. (1996). Project Finance Teaching Note. Unpublished. Corgel, J.H., Mcintosh, W. and Ott, S.H. (1995). Real Estate Investment Trusts: A Review of Financial Economics Literature. Journal of Real Estate Literature. 3 p. 13-43. Creswell, J.W. (1994) Research Design: Qualitative and Quantitative Approaches, Thousand Oaks, CA: Sage Publications. Creswell, J.W. (2002) Educational research: Planning, Conducting and evaluating quantitative and qualitative research, Upper Saddle River, NJ: Merrill Pearson. Creswell, J.W. (2003) Research Design: Qualitative, Quantitative and Mixed Methods Approaches (2nd Ed), Thousand Oaks, CA: Sage Publications.

52

A. B Odunsi 2011

Creswell, J.W. and V.L. Plano Clark (2007) Designing and Conducting Mixed Methods Research, Thousand Oaks, CA: Sage Publications. Ernst and Young (n.d.) Real Estate Investment Trusts (REIT) Application in Turkey. Turkey: Ernst and Young. Erol, I. And Tirtiroglu, D. (2008). The Inflation-Hedging properties of Turkish REITs. Applied Economics. 40 (20) p. 2671-2696. Erol, I. and Tirtiroglu, D. (2011). Concentrated Ownership, No Dividend Payout Requirement and Capital Structure of REITs: Evidence from Turkey. Journal Real Estate Finance Economics. 43 p. 174-204. Ewing, B.T. and Payne, E.J. (2005). The Response of Real Estate Investment Trust Returns to Macroeconomics Shocks. Journal of Business Research. 58 p. 293-300. Idigbe, A. (2009). Insolvency of Capital Market intermediaries and Adequate Protection for Investors. International Law Office Knight Frank (2009). Africa Report 2009. London: Knight Frank LLP. Larry Wynant. Essential elements of project financing, Harvard Business Review. MayJune 1980, p.166. Morka, C.F. (2007). A place to live: A case study of the Ijora-Badia Community in Lagos, Nigeria. A case study prepared for Enhancing Urban Safety and Security: Global Report on Human Settlements 2007. Nigeria. Central Bank of Nigeria (2009). Annual Report and Statement of Accounts for the year ended 31st December, 2009. Nigeria: Central Bank of Nigeria. Nigeria. Investment and Securities Act, 2007: Explanatory Memorandum. Nigeria: National Assembly. Nigeria. National Bureau of Statistics (2011). Consumer Price: June 2011 Index. Nigeria (495). Nigeria. Pension Reform Act (2004). Nigeria: National Assembly. Novare (2010). Investing in Africa: Funds and Managers Survey November 2010. South Africa: Novare Investment (Pty) Ltd. Nubi, T.O (n.d.) Housing Finance in Nigeria Need for Re-engineering. Unpublished. Nwachukwu, I.N., Ehumadu. F.C., Mejaha, R.O., Nwaru, J.C., Agwu, N.M. and Onwumere, J. (n.d.) Empirical Assessment of Nigerias Agricultural Export and Economic Welfare. Obadan, M.I. and Odusola, A.F. (n.d.). Productivity and Unemployment in Nigeria. Unpublished. Ogunba, O.A. and Ajayi C.A. (2007). The Response of Nigerian Valuers To Increasing Sophistication in Investors Requirements. Journal of Property Investment and Finance. 25 (1) p. 43-61.

53

A. B Odunsi 2011

Olaleye, A. and Adegoke, O.J. (2009). Homeowners perception of insurance of real estate development in Lagos, Nigeria. International Journal of Housing Markets and Analysis. 2(2) p. 179-189. Olaleye, A., Aluko, B.T. and Ajayi, C.A. (2007). Factors Influencing the choice of property portfolio diversification evaluation techniques in Nigeria. Journal of Property Investment and Finance. 25(1) p. 23-42. Onibokun, G.A. (2004). Housing Finance In Nigeria: A Critical Survey Of Private And Public Sources. Liverpool University Press. p. 277-292 Oreagba, F. (2010). Position Paper on the Implementation of REITs in Nigeria (N-REIT). Unpublished. Sanusi, J.O (2003) Mortgage Financing in Nigeria; Issues and Challenges. 9th John Wood Ekpenyong Memorial Lecture. January 49, 2003. Nigeria: Nigerian Institute of Estate Surveyors and Valuers. Sebehela, T. (2007). An Investigation into the Impact of Listed Property (Property Unit Trusts) in a diversified Investment Portfolio in South Africa. A research project submitted to the Faculty of Engineering and the Built Environment, of the University of the Witwatersrand, in partial fulfilment of the requirements for the degree of Masters of Building (Property Development and Management). University of the Witwatersrand. The World Bank (2010). Performance Assessment Review Report World Bank Economic Reports on Growth Diagnostics in Four African Countries: Ghana Mauritus, Nigeria and Uganda. (Report 55404) Titman, S and Warga, A. (1986). Risk and Performance of Real Estate Investment Trusts: A Multiple Index Approach. AREUEA Journal. 14 (3) p. 414-431. Tuffe, D. (2001) Coming to Your Field Soon: A Primer on VARs and VECMs Class Lecture Notes United States of America. Chan, K.C., Hendreshott, P.H. and Sanders, A.B. (1990). Risk and Return of Real Estate: Evidence from Equity REITs. National Bureau of Economic Research Working Papers Series (3311). Whipple, A. (2008). Country Study: Nigeria. Economics 463.

54

A. B Odunsi 2011

APPENDIX Appendix 1- Research Survey

1. What type of company are you? Commercial Bank Other ____________ 2. How do you fund your real estate developments/mortgages? Directors Equity Other businesses Debt/Loans REIT Public Listing Joint Venture Private Equity Other _______________________________________ Mortgage Bank Property Development/Investment Company

3. Are you currently considering adopting REIT structure in financing your real estate developments/mortgages? Yes No

4. If Yes to Question 3, are there any challenges you are encountering in adopting REIT structure? Yes No

5. If Yes to Question 4, what are the challenges you are encountering in adopting REIT structure in financing your real estate developments? Limited Expertise High conversion costs Poor Investor confidence Stringent conversion requirements Limited knowledge of REITs Timing Other _________________

Poor Capital Market conditions

_____________________________________________________________________________ 6. Do you see your company adopting REIT structure in future? Yes No

7. What is your position in your company ______________________ 8. What is the name of you Company ___________________________________

55

A. B Odunsi 2011

Appendix 2- VAR Optimal Lag Estimates

South Africa: VAR Lag Order Selection

Lag 0 1 2 3 4 5 6 7 8 LogL 15.83362 856.542 876.3111 888.5234 898.9588 906.116 914.4479 918.857 925.9675 LR NA 1628.459 37.359 22.50128 18.73445* 12.51095 14.17079 7.290692 11.42157 FPE 0.000164 3.36E-10 2.84E-10 2.70E-10 2.64e-10* 2.73E-10 2.76E-10 2.98E-10 3.09E-10 AIC -0.202104 -13.29987 -13.46947 -13.52005 -13.54266* -13.51364 -13.50312 -13.43082 -13.40106 SC -0.134919 -13.03113* -12.99917 -12.8482 -12.66925 -12.43867 -12.22659 -11.95274 -11.72142 HQ -0.174808 -13.19069 -13.27839* -13.24709 -13.1878 -13.07689 -12.98448 -12.83029 -12.71865

Turkey: VAR Lag Order Selection

Lag 0 1 2 3 4 5 6 LogL 74.03236 344.5014 346.7728 349.5636 352.3315 358.8879 363.8159 LR NA 505.4667* 4.021543 4.666621 4.356004 9.673298 6.786178 FPE 1.95E-05 3.70e-09* 4.63E-09 5.70E-09 7.07E-09 7.80E-09 9.16E-09 AIC -2.32893 -10.90168* -10.68108 -10.4775 -10.27316 -10.19304 -10.05954 SC -2.225116 -10.48643* -9.954381 -9.439361 -8.923589 -8.532029 -8.087082 HQ -2.288244 -10.73894* -10.39628 -10.07064 -9.744253 -9.542077 -9.286514

* indicates lag order selected by the criterion LR: sequential modified LR test statistic (each test at 5% level) FPE: Final prediction error AIC: Akaike information criterion SC: Schwarz information criterion HQ: Hannan-Quinn information criterion

56

A. B Odunsi 2011

Appendix 3- VAR Estimates

South Africa Vector Auto-regression Estimates LOG_SA_REIT_INDEX LOG_SA_REIT_INDEX(-1) 1.0978 -0.09265 [ 11.8486] LOG_SA_REIT_INDEX(-2) -0.234291 -0.13767 [-1.70186] 0.101437 -0.13864 [ 0.73167] -0.019091 -0.09274 [-0.20587] 0.009475 -0.1982 [ 0.04781] 0.124951 -0.26498 [ 0.47155] -0.188713 -0.27346 [-0.69010] 0.008799 -0.20325 [ 0.04329] -0.613913 -1.86484 [-0.32920] 0.372925 -2.95854 [ 0.12605] 0.409852 -2.86636 [ 0.14299] -0.011465 -1.7924 [-0.00640]

LOG_INTEREST_RATE -0.038254 -0.0416 [-0.91951] -0.034594 -0.06182 [-0.55962] 0.012902 -0.06225 [ 0.20725] 0.052506 -0.04164 [ 1.26094] 0.851543 -0.08899 [ 9.56846] 0.409826 -0.11898 [ 3.44448] 0.002504 -0.12279 [ 0.02039] -0.328842 -0.09126 [-3.60329] 0.528189 -0.83736 [ 0.63078] -0.062574 -1.32845 [-0.04710] 0.566969 -1.28706 [ 0.44051] -1.070007 -0.80483 [-1.32949]

LOG_CPI -2.69E-05 -0.00462 [-0.00582] -0.00557 -0.00686 [-0.81170] -0.005304 -0.00691 [-0.76762] 0.010094 -0.00462 [ 2.18373] 0.031356 -0.00988 [ 3.17409] -0.030189 -0.01321 [-2.28586] 0.007088 -0.01363 [ 0.52004] -0.007119 -0.01013 [-0.70276] 1.232283 -0.09295 [ 13.2578] -0.195477 -0.14746 [-1.32562] 0.010174 -0.14287 [ 0.07121] -0.042259 -0.08934 [-0.47303] 57

LOG_SA_REIT_INDEX(-3)

LOG_SA_REIT_INDEX(-4)

LOG_INTEREST_RATE(-1)

LOG_INTEREST_RATE(-2)

LOG_INTEREST_RATE(-3)

LOG_INTEREST_RATE(-4)

LOG_CPI(-1)

LOG_CPI(-2)

LOG_CPI(-3)

LOG_CPI(-4)

A. B Odunsi 2011

-0.300701 -0.32992 [-0.91142] 0.987553 0.986287 0.856579 0.085201 780.1695 143.5844 -1.993656 -1.708331 5.766042 0.727572

0.349871 -0.14814 [ 2.36171] 0.980441 0.978452 0.172704 0.038257 492.9315 248.474 -3.595023 -3.309698 2.194271 0.260622

-0.016094 -0.01644 [-0.97870] 0.999503 0.999453 0.002128 0.004247 19780.5 536.4395 -7.991442 -7.706117 4.666266 0.181504

R-squared Adj. R-squared Sum sq. Resids S.E. equation F-statistic Log likelihood Akaike AIC Schwarz SC Mean dependent S.D. dependent

Determinant resid covariance (dof adj.) Determinant resid covariance Log likelihood Akaike information criterion Schwarz criterion

1.81E-10 1.32E-10 932.3976 -13.63966 -12.78368

58

A. B Odunsi 2011

Turkey Vector Auto-regression Estimates LOG_TURK_REIT_INDEX LOG_TURK_REIT_INDEX(-1) 0.827941 -0.06779 [ 12.2139] LOG_INTEREST_RATE(-1) -0.270963 -0.15169 [-1.78624] -0.508776 -0.30946 [-1.64408] 4.036537 -2.12176 [ 1.90245]

LOG_INT_RATE 0.003739 -0.0209 [ 0.17892] 0.939057 -0.04677 [ 20.0777] -0.147677 -0.09541 [-1.54775] 0.882683 -0.65419 [ 1.34928]

LOG_CPI 0.001673 -0.00373 [ 0.44833] -0.00096 -0.00835 [-0.11500] 0.991411 -0.01703 [ 58.2115] 0.044201 -0.11677 [ 0.37853]

LOG_CPI(-1)

R-squared Adj. R-squared Sum sq. Resids S.E. equation F-statistic Log likelihood Akaike AIC Schwarz SC Mean dependent S.D. dependent

0.833601 0.825549 1.406715 0.150629 103.5326 33.34717 -0.889308 -0.756602 4.263206 0.360637

0.966448 0.964824 0.133728 0.046442 595.2911 111.003 -3.242514 -3.109808 3.026418 0.247625

0.995941 0.995744 0.004261 0.00829 5070.57 224.7326 -6.688866 -6.556159 4.890562 0.127076

Determinant resid covariance (dof adj.) Determinant resid covariance Log likelihood Akaike information criterion Schwarz criterion

3.11E-09 2.58E-09 371.6638 -10.8989 -10.50078

59

A. B Odunsi 2011

Appendix 4- Granger Estimates Causality/Block Exogeneity Wald Tests

Dependent variable: LOG_TURKEY_REIT_INDEX Excluded Chi-sq df LOG_INTEREST_RATE 3.190671 1 LOG_CPI 2.70301 1 All 3.23313 2 Dependent variable: LOG_INTEREST_RATE Excluded Chi-sq LOG_TURKEY_REIT_INDEX 0.032011 LOG_CPI 2.39554 All 4.8266 Dependent variable: LOG_CPI Excluded LOG_TURKEY_REIT_INDEX LOG_INTEREST_RATE All

Prob. 0.0741 0.1002 0.1986

df 1 1 2

Prob. 0.858 0.1217 0.0895

Chi-sq 0.201003 0.013225 0.411564

df 1 1 2

Prob. 0.6539 0.9084 0.814

Dependent variable: LOG_SA_REIT_INDEX Excluded Chi-sq LOG_INTEREST_RATE 1.826506 LOG_CPI 3.024519 All 3.97524 Dependent variable: LOG_INTEREST_RATE Excluded Chi-sq LOG_SA_REIT_INDEX 6.492967 LOG_CPI 3.301347 All 14.77015 Dependent variable: LOG_CPI Excluded LOG_SA_REIT_INDEX LOG_INTEREST_RATE All

df 4 4 8

Prob. 0.7676 0.5537 0.8594

df 4 4 8

Prob. 0.1652 0.5087 0.0638

Chi-sq 7.572502 13.32578 22.86155

df 4 4 8

Prob. 0.1086 0.0098 0.0035

60