Africa’s REIT market is gaining momentum as a more accessible entry point into real estate, enabling investors of varying sizes to gain exposure to income-producing assets without owning property directly. South Africa boasts a mature REIT market, controlling about 95% of the continent's REIT market from a market capitalization standpoint. This growth, however, is clearly not even. Emerging markets like Nigeria and Kenya are still battling structural challenges that continue to hinder the growth of REITs.
In an interview with Prof. Kola Akinsomi, an associate professor of real estate finance and investment at the University of the Witwatersand, he extensively discussed the Operator’s dynamics across REITs markets in Africa, the sectors driving growth in the REITs market and most importantly lessons that can be learnt from South Africa as a dominant market within the continent. This article documents the insights from the interview.
Here are some insights from the interview:
The REITs Landscape in Africa has about 95% of the REITs markets in South Africa. In terms of geography, South Africa is the dominant market. There are certain characteristics the Operators in South Africa focus on that set them apart from other regions some of which include; financial discipline, high reporting standards set by the GSE which usually contains strict requirements to be listed on the stock exchange, end of the year reports that needs to be revealed to shareholders, and discipline in terms of capital structure.
To be able to qualify as a REIT in South Africa, operators need 75% of their returns to be in properties and redistributed to their shareholders. When it comes to portfolio, there is a lot of agility and liquidity in the South African’s REITs market. For instance, if an asset class is not doing so well, operators can either diversify, sell or even recycle it to invest in another type of asset. REITs Operators in South Africa diversify geographically to other regions of the world which improves investment confidence and encourages exposure coming from Pension Funds and Insurance companies. Every market is as good as the institution driving it.
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Asset Class Agility
There are about 32-33 REITs operators in South Africa with the more dominant players like Growth Point, Redefine, Equity Property Fund and Vukile. There is such a divergence of variation in terms of their portfolio. For instance, Growth point has an exposure to a diversified portfolio which includes, rental, office and industrial spaces. They have the ability to move into asset classes that are not known as the “traditional” asset classes. In the past few years, they have gone into Student Housing Accommodation which has a low risk and a predictable cashflow. Healthcare is not left out as the healthcare business in South Africa is a big business because those with stable employment are required to get health insurance in which a part of their income is deducted monthly, even hospital beds are cashflows. The presence of scale in the form of equity and the ability to easily access debt as a result of good relationships they have with banks are part of what is driving growth in South Africa’s REITs market.
Vukile’s exposure outside of South Africa is about 60%. Vukile focuses on rural, convenience and small shopping malls that guarantee cash flows. Equity Property Fund on the other hand is exposed to more industrial, logistics and high quality distribution centres both in and out of South Africa. This is as a result of the growth in logistics following the growth in e-commerce post COVID.
Institutionalisation of Real Estate Across Africa - What sets South Africa apart.
REIT has to do with institutionalisation, large scale deployment of capital the industry will collapse if there is no capital to invest. A lot of institutional grade assets are held by private individuals, churches and big conglomerates who would rather remain private because there is a lot of bureaucracy and scrutiny when it comes to REIT.
The depth of the pension fund market in each country matters. For instance, South Africa and Nigeria have the same exposure of about 1% of their pension funds invested in REITS. The real difference is in the size of the fund itself. South Africa’s Pension fund market is about $500 billion and Nigeria is less than 105 of that. Across the world, the major capital provider for REITs is Pension Funds. A thriving Pension Funds means there is liquidity to be deployed. Pension Funds in Nigeria and Ghana have more exposure to government bonds because of the yield is more attractive (about 15%-20%).
There is a structural problem and until that is fixed there will not be growth in emerging markets like Kenya and Nigeria. This can be done by ensuring that government bonds are less attractive with lower yields in order to encourage Pension Funds to invest. It should be understood that Real Estate is the backbone of any economy as it creates employment from the construction stages to the management stages. This has been able to be achieved in the US as their major focus is real estate which is expanding their economy.
For the REITs market to thrive, the problem has to be dealt with which is very multi-faceted with different stakeholders; government, regulatory authority, operators and investors. In South Africa, as long as operators redistribute 75% of their income, they are excluded from paying capital gains tax and income tax. Whereas in markets like Nigeria, a lot of regulations do not favour REIT as they still pay stamp duty and withholding tax which is to be wiped out.
The government should be enlightened on what is happening in the industry especially with asset classes that have the ability to improve the economy which is the function of the professionals closer to the government. REITs need funding, pension funds need to be incentivized for them to invest in the REITs market. Operators in the rest of the regions are passively participating in the REITs market which is hindering growth.
Final Thoughts
Institutional investments are not quick fix investment but long term investments. Quick fix investment cannot grow the economy. More institutional players need to be more engaged with the REITs markets. Africa at large needs to meet the requirements set out by foreign investors in order to experience the growth the market desires as our market and asset classes are small, environment is complex. Once we solve the biggest issue which is funding through mobilising local capital from informal sectors into very structured institutional vehicles then confidence can be restored to borrow money.
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With just 3,577square meters in land mass, Lagos is home to over 17 million residents, making it one of the most densely populated cities in the world. One of the most pronounced effects of clear overpopulation in overcrowded cities like Lagos is the increase in informal settlements, land grabbing, and illegal construction. Internal data from the Lagos State government shows that more than 349 buildings have been erected illegally and do not comply with the planning laws set out by the state. In response, the Lagos State Building Control Agency (LASBCA) and the Ministry of Physical Planning and Urban Development have intensified enforcement of planning laws to ensure that buildings within Lagos State are designed, constructed, and maintained to a high standard of safety. Their enforcement efforts have led to numerous building demolitions and are primarily targeted at three recurring violations across the state, which we will be discussing below.
- Lack of building development permit:
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Failure to obtain required development permits remains one of the most common triggers for demolition across Lagos. Under Section 27(1) of the Lagos State Urban and Regional Planning and Development Law, no building is allowed to be erected across the state, except when necessary permits and approvals have been duly sought and obtained. “No person shall carry out any development in Lagos State without obtaining a permit from the relevant planning authority.” Non-compliance with section 27(1) of the Lagos State Urban and Regional Planning and Development Law authorises the state government to demolish any building that has not sought and obtained the necessary approvals. Despite this clear guideline, unauthorised construction continues to proliferate in the state. In a recent enforcement action, 13 illegal buildingswere demolished in Lagos for non-compliance, highlighting the Government’s resolve to clamp down on developments that violate planning regulations. Several factors may explain why some developers bypass the approval process, including a lack of awareness of regulatory requirements, the perceived complexity or delay in obtaining permits, and, in some cases, a calculated risk to evade official fees or oversight. While these issues don’t justify non-compliance, they underscore the need for continued public education, transparency, and reform of the permitting process.
- Encroachment on Drainage Channels and Setbacks:
Building on drainage channels and designated setbacks stands out as one of the leading causes of demolition across Lagos. This issue not only breaches planning regulations but has also contributed to environmental and public safety risks.The Lagos State Building Control Agency(LASBCA) mandates a minimum setback of nine (9) meters for residential buildings in high-density, flood-prone zonessuch as Victoria Island, Apapa, and the Lekki Peninsula Schemes I and II. Despite these regulations, many developers have reclaimed and erected structures directly on waterways, obstructing water flow and increasing the risk of flooding. Recently, the Lagos state government marked 39 buildingsfor demolition in the Eti-Osa Local Government Area (mostly along the Ikota corridor) for obstructing drainage channels and encroaching.Similar actions have been taken in other areas like Amuwo Odofin. These demolitions have left many homeowners devastated. In response, affected owners have petitioned the government through their community associations, while others seek court injunctions to challenge the demolition or delay it pending clarification of their land status. Urban experts, however, emphasise the need for property buyers to secure proper planning permits from the Lagos StatePhysical Planning Permit Authority(LASPPPA) before embarking on any building or development project within the state.In many cases, properties built on canals, drainage channels, or government-designated right-of-way have little to no legal standing, making it difficult for affected owners to obtain compensation or favourable rulings in court. This is because such developments typically contravene established planning laws and are considered public safety hazards. We love your feedback. Let us know what you think about this article or your experience renting in Africa by sending an email toadvisory@fortrenandcompany.com. You can also join the conversation here onLinkedIn.