OPERATION OF REAL ESTATE INVESTMENT TRUST SCHEMES IN

NIGERIA

1. INTRODUCTION
1.1.

This paper is aimed at giving a brief introduction to what Real Estate

Investment Trusts (REITs) are and how they operate in Nigeria. It is
noteworthy to mention that under Nigerian Law, REITs are termed as
Real Estate Investment Company/ Trust/Scheme, however, for the
purposes of this paper, the term REITs will be used throughout.

1.2.

The rules are too voluminous to be reproduced and explained for the
purposes of this Article, therefore, only the salient points will be
briefly discussed in order to give an idea to the readers of this Article
of how REITs operate in Nigeria, thus, any reader who wishes to
know more about REITs in Nigeria will have to conduct further
research.

2. REITs DEFINED
2.1.

REITs are defined in the ninth edition of Blacks Law Dictionary as

A company that invests in and manages a portfolio of real estate, with
the majority of the trusts income distributed to its shareholders

2.2.

Section 856 of the Internal Revenue Code of the United States of

America provides the defines a REIT as a corporation, trust or
association

2.2.1. Which is managed by one or more trustees or directors;

2.2.2. The beneficial ownership of which is evidenced by transferrable
shares, or by transferable certificates of beneficial interest;
2.2.3. Which (but for the provisions of this part) would be taxable as a
domestic corporation;
Page 1 of 14

2.2.4. Which is neither

2.2.4.1. A financial institution referred to in Section 582(c) (2), nor
2.2.4.2. An insurance company to which subchapter L applies;
2.2.5. The beneficial ownership of which is held by 100 or more person;
2.2.6. Subject to the provisions of subsection (k), which is not closely held
(as determined under subsection (h)); and
2.2.7. Which meet the requirements of subsection (c)...
2.3.

The requirements of subsection (c) are not exactly relevant for the
purposes of this paper, as they deal with specific requirements under
the laws of the United States.

2.4.

According to the reita website launched by the British Property

Federation a Real Estate Investment Trust is a company that manages
a portfolio of real estate to earn property for shareholders.

2.5.

In Nigeria, Rule 508 of the Securities and Exchange Commission

Rules and Regulations 2013 (The Rules) provides that, for the
purpose of the rules, a real estate investment scheme shall qualify as
an asset backed-security or a mortgage security (in the case of a
mortgage and hybrid real estate investment scheme).

2.6.

Section 193 of the Investments and Securities Act (The Act)

describes a REIT as a body corporate incorporated for the sole
purpose of acquiring intermediate or long term in real estate or
property development may raise funds from the capital market
through the issuance of securities which shall have the following
characteristics:

2.6.1. An income certificate giving the investor a right to a share of the

income of any property or property development;
2.6.2. An ordinary share in the body corporate giving the investor voting
rights in the management of that body corporate.
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2.7.

Real Estate Investment Trusts have also been defined as entities that
are taxed as corporations and that qualify for a tax deduction for
dividends paid to shareholders provided that several organisational,
investment, and operational tests are satisfied on a year-by-year
basis.1

3. HISTORY OF REAL ESTATE INVESTMENT SCHEMES

3.1.

The REIT concept was first constructively developed in the United

States as far back as the 1880s, when investment trusts in the
United States were used to invest in both movable and immovable
property. In the 1880s, trusts were not taxed at the corporate level.
By forming a trust, investors were able to avoid being taxed if they
distributed the trust to trust beneficiaries.2

3.2.

Other Analysts and REIT historians posit that the evolution of the
REIT system as its is known today evolved from the industrial
revolution in Boston in the early 1900s, which put money into a few
peoples hands, which in turn led to a demand for investing
opportunities.

However,

existing

state

laws

did

not

permit

corporations to own real estate unless the property was essential for
the business to function, hence, a corporation in Boston could not
buy a building purely for investment or redevelopment purposes.
Hence the Massachusetts Trust was created to legally allow
companies to invest in real estate for non-business purposes.
Through

agreements

with

the

federal

government,

the

Massachusetts Trust was legally allowed to remove federal taxes.3

William A. Kelly; Real Estate Investment Trusts Handbook;1998

Gordon Mark; The Complete Guide to Investing in REITs; How t o Earn High Rates of Return Safely; 2008
333
ibid
2

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3.3.

In 1938, the US Supreme Court held in the case of Morrissey v.

Commissioner4 that real estate investment trusts were not exempt
from corporate taxation structures.

3.4.

A formal legal framework was finally introduced to regulate the real

estate investment trust in 1960 when President Eisenhower of the

United States signed the Real estate Trust Investment Act into law,
which provided a preferential tax regime that applied to only trusts.5
3.5. From these developments, the REIT industry has grown significantly
and has spread to several countries of the world, Nigeria Inclusive.
Today, REITs in the US pay no corporate taxes provided; they distribute
at least 90% of their taxable income to unit holders who then pay tax at
their individual tax rates.6
4. THE IDEA BEHIND REITs.
4.1.

The role of REITs is majorly to unitise and securitise otherwise

illiquid real estate investment. REITs provide an intermediation role
allowing real estate for which there may be otherwise a limited for
possible purchasers to be owned indirectly by investors who would
otherwise be unable to hold such real estate.7

4.2.

Put in simpler terms, REITs allow individuals pool funds to own real
estate that they would otherwise be unable to purchase individually.

5. TYPES OF REITs
5.1.

There are basically three different types of REITs i.e.

5.1.1. Equity REITs;

5.1.2. Mortgage REITs;

296 U.S. 344 (1935)

Guide to Global Real Estate Investment Trusts; Stefano Simontacchi, Uwe Stoschek; 2011; Kluwer Law
International
6
Parker David Global Real Estate Investment Trusts: People Process Management; 2012
7
ibid
5

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5.1.3. Hybrid REITs.

5.2.

Equity REITs

5.2.1. Equity REITs were organised frequently as blind pools for the
purpose of investing in several undignified rental income producing
properties to be held for an indefinite period for the production of
cash flow from rents, which would be distributable as dividends to
the beneficial owners.8 In contrast to the unspecified trusts there
are specified trusts which are organised for the acquisition of
specific properties which are described in the offer.
5.2.2. Simply put, Equity REITs are real estate companies are real estate
companies that acquire commercial properties such as office,
shopping centres and apartment buildings and lease such
properties to tenants who pay rent. After paying the expenses
associated with operating their properties, equity REITs pay out the
net profits from the rents to their shareholders as dividends. In all
cases, the distribution of profits is designed to approximate the
investment return investors would receive if they owned the
property directly.9

5.3. Mortgage REITs

5.3.1. Mortgage REITs invest the proceeds from the sale of their shares in
mortgages secured by real property, or mortgage backed assets. Some
mortgage trusts limit their investments to construction and other
short-term mortgages, while others invest only in long-term or
permanent mortgages. The trust derives its profit from the interest on
the investments and the sale of the mortgages. Apart from the basic
Mortgage REIT there exists, a type of REIT called the dedicated trust,
which is formed to provide mortgage financing for a particular
8
9

Kelly William; Real Estate Investment Trust Handbook;

http://www.reit.com/investing/reit-basics/guide-equity-reits

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developer of properties. These trusts are used to arrange assured

sources of debt financing for their projects.
5.4. Hybrid REITS
5.4.1. Hybrid REITs combine the functions of both Equity and Mortgage
REITs, hence, earning and distribution income both from rents and
from mortgage facilities or mortgage Backed assets.
6. THE NIGERIAN REIT REGIME
6.1.

REITS in Nigeria are basically governed by the following pieces of

legislation and Rules:

6.1.1. The Investments and Securities Act 2007;

6.1.2. Companies and Allied Matters Act 2004;
6.1.3. SEC Rules and Regulations 2013;
6.1.4. Corporate Affairs Commission Rules 2012;
6.1.5. Nigerian Stock Exchange Regulations; and
6.1.6. Federal Inland Revenue Service (Establishment) Act 2007;
6.1.7. Companies Income Tax Act;
6.1.8. Personal Income Tax Act.
6.2.

The Regulatory Bodies responsible for regulating the REIT industry

are:

6.2.1. Securities and Exchange Commission (SEC; The Commission);

6.2.2. Corporate Affairs Commission;
6.2.3. Nigerian Stock Exchange; and
6.2.4. Federal Inland Revenue Service.
7. REQUIREMENTS OF REITs IN NIGERIA
7.1. REITs regimes in different countries are governed differently either by
specific legislation or rules scattered in different pieces of legislation. In
Nigeria REITs are primarily governed by the Investments and Securities
Act (ISA) and the Securities and Exchange Commissions Rules and

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Regulations of 2013. Under Nigerian Law REITs are regarded as a form

of Collective Investment Schemes.
7.2.

Collective Investment Schemes are defined in Section 153(1) of the

ISA as a scheme in whatever form, including an open-ended
investment company, in pursuance of which members of the public are
invited or are permitted to invest money or other assets in a portfolio,
and in terms of which

7.2.1. Two or more investors contribute money or other assets to hold a

participatory interest in a portfolio of the scheme through shares,
units or any other form of participatory interest;
7.2.2. The investors share the risk and the benefit of investment in
proportion to their participatory interest in a portfolio of a scheme or
on any other basis determined in the deed, but not a collective
investment scheme authorised by any other Act.
7.3.

Section 154 of the Act further provides that the Commission may
approve a collective investment scheme which is administered as:

7.3.1. Unit trust scheme;

7.3.2. Open-ended investment company;
7.3.3. Real Estate Investment Company or trust.
7.4.

The SEC Regulations specifically make provisions regulating the

formation and operation of REITs in Rules 508 to 542. Rule 508
describes real estate as income generating property consisting of
land, buildings and Special Purpose Vehicles holding such income
generating lands and buildings. The Rule also states that real estate
related assets include but are not limited to shares of real estate
companies and higher rated real estate investment schemes. Rule
510 of the Regulations states that Real Estate Investment Schemes
can be constituted either as a company or a trust.

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7.5.

The SEC Regulations has two separate requirements for trusts and
for companies that operate as REITs. Rules 511 to 525 deal with
the requirements of REITs operating as companies while Rules 526
to 542 make provision for the requirements for REITs constituted as
trusts. Whichever form is chosen, every REIT is required to be
registered with the Commission.10

8. REQUIREMENTS FOR AUTHORISATION AS A COMPANY

8.1.

Registration

with

the

Corporate

Affairs

Commission;

Requirements for a Prospectus;

8.1.1. A REIT Company is required to have as part of its objects clause in
its Memorandum of Association the object of investing in real
estate and real estate businesses. The Commission requires the
presentation of Certified True Copies of the Companys certificate of
incorporation, Memorandum and Articles of Association, form CAC
7 i.e. particulars of the directors of the Company. As an aside, the
Commission requires two certified copies of the companys
certificate

of

incorporation;

however,

the

Corporate

Affairs

Commission (CAC) does not issue certified copies of a certificate of

incorporation of a company except in cases of loss, which requires
a formal application to the Registrar General of the CAC.
8.1.2. The Commission also requires evidence of increase of share capital
(where applicable), evidence of the appointment of a property
manager who is registered with the CAC, copies of the draft
prospectus and abridged prospectus of the Company in respect of
the units of the scheme to be sold. It is also noteworthy that a REIT
company is mandated to file the valuation report by a real estate
valuer registered with the CAC every subsequent quarter after an
acquisition has occurred.
10

See Rule 511 and 526 of the SEC Rules and Regulations

Page 8 of 14

8.1.3. The required contents of the prospectus of a REIT company are set
out in Rule 515; In addition to the contents set out in Rule 15,
Rule 512 provides that the order of contents need not follow any
particular order after compliance with Rule 515, provided that the
information is not set out in an obscure manner, thereby making it
incomplete or misleading. Rule 513 provides for statements that
must be included in a prospectus while Rule 514 makes it
compulsory for every prospectus to be dated on the front cover and
for such date not to be earlier than the date of the completion of
the board meeting or the date of the execution of the prospectus.
8.1.4. By the provisions of Rule 515(1) the initial public offer of a REIT
shall not be less than N1,000,000,000 (one billion Naira). This is
indicative of the minimum share capital requirement of a REIT
company wishing to float an initial public offer. while subsequent
offers cannot be less than N500,000,000 (Five Hundred Million
Naira)

8.2. Minimum Subscription; Asset Allocation

8.2.1. Rule 520 provides for the minimum subscription of a Real Estate
Investment

Scheme

making

compulsory

for

Real

Estate

Investment Company/Scheme to have at least 50% of its shares

subscribed to at the end of a public issue. The Commission will
only approve allotment of the shares/slots in such Scheme when at
least 50% of it has been subscribed to (excluding the shares that
have been underwritten). Where the requirement is not met, the
Commission may ask the issuing house to abort the offer in the
interest of the investing public.

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8.3. Rule 521 specifies what kinds of assets and in what percentage REITs
can invest their funds in. In a way, this rule recognises the typology
of REITs earlier discussed in this Article as it provides thus:
8.3.1. For close-ended real estate investment company, the following
requirements shall apply:
8.3.1.1. Where the investment company is equity based, at least 75% of
the funds total assets shall be in real estate; the remaining 25%
may be in real estate related assets. Provided that not more than
10% shall be in liquid assets;
8.3.2. Where the investment company is mortgage based, at least 75% of
the funds total assets shall be in mortgage assets; the remaining
25% may be in real estate related assets. Provided not more than
10% shall be in liquid assets;
8.3.3. Where the investment company is a hybrid, at least 40% of the
funds total assets shall be in real estate; at least 40% shall
mortgage assets, while the remaining 20% may be in real estate
related assets. Provided that not more that 10% shall be in liquid
assets;
8.3.4. the level of new development activity by the fund manager shall not
exceed 20% of the fund gross asset value;
8.3.5. The manager shall hold on to any development for a minimum of
two (2) years before disposing of it.
8.3.6. For open-ended real estate investment company, the following shall
apply11:
8.3.6.1. Where the investment company is equity based, at least 70% of
the schemes assets shall be in real estate or real estate related
assets, a maximum of 10% of the schemes assets shall be in liquid
assets at all times and 20% may be in other assets;
8.3.6.2. Where the investment company is mortgage based, at least 70%
of the funds total assets shall be in mortgage assets; a maximum
11

Section 152 of the ISA defines an Open-ended Investment Company as a company with an authorized share
capital whose articles of association authorizes the acquisition of its own shares, structured in such a manner
that it provides for the issuing of different classes of shares to investors, each class of shares representing a
separate portfolio with a distinct investment policy

Page 10 of 14

of 10% of the schemes assets shall be in liquid assets at all times

and 20% may be in other real estate assets;
8.3.6.3. Where the investment company is a hybrid, at least 40% of the
funds total assets shall be in real estate; at least 40% shall be in
mortgage assets, while the remaining 20% may be in real estate
related assets. Provided that not more than 10% shall be in liquid
assets;
8.3.6.4. The provisions of paragraphs (d) and (e) above shall apply.
8.4.

The regulations also specifically provide that the assets of a Real

Estate Investment Scheme shall not be invested outside Nigeria.

8.5.

Valuation Report, Quarterly Report, Insurance; Borrowing:

8.5.1. REITs are mandated by the regulations to file a valuation report by

a real estate valuer registered with the Commission every 2 years.
The Commission also requires REITs for file quarterly reports on
the performance of the scheme and the real estate assets of such
schemes must be insured.
8.5.2. A limitation is placed on the borrowing powers of a REIT buy Rule
525, which provides that notwithstanding anything contained in
the Articles of Association of a REIT company, it shall not borrow
beyond 25% of the shareholders fund.
9. REQUIREMENTS FOR AUTHORISATION AS A TRUST
9.1. Registration with the Commission; Prospectus Requirements
9.1.1. Unlike the requirements demanded of a REIT Company with
respect to evidence of Registration with the CAC, a REIT
constituted as a trust can apply to the Commission for registration
on the appropriate SEC forms.12
9.1.2. The requirements of the prospectus for the sale of the units of a
proposed REIT as set out in Rule 527 to 530 of the SEC Rules are
materially the same with the requirements of a prospectus under
12

See Rule 526 of the SEC Rules and Regulations

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the rules regulating REIT companies. One of the factors affecting

the difference between the requirements of Rule 515 and Rule 530
is the presence of a Fund Manager to manage the funds and
investments of the trust, in the case of a REIT constituted as a
trust. The Trust is meant to provide detailed corporate information
of the fund managers.
9.1.3. In addition, the Rules as to the Contents of a Trusts prospectus
appear more stringent as they require more information than
required of REIT Companies such as the history and prospects of
the scheme, the investments policy of the scheme, the schemes
peculiar risks etc.
9.2.

Form and contents of a Trust Deed

9.2.1. Rules 531, 532 and 533 set out the requirements of the
Commission with respect to the Trust Deed setting up the REIT. A
Trust Deed is required to state the following:
9.2.1.1. Date if the trust deed;
9.2.1.2. Name of the management company (fund manager);
9.2.1.3. Name of the trustee company;
9.2.1.4. Name of the scheme constituted by the deed;
9.2.1.5. Name of the scheme constituted by the trust deed;
9.2.1.6. The trustee will be liable will be liable for breach of its duties
where it fails to carry out its responsibilities under the trust deed
or report breach of the terms to the Commission.
9.2.2. Rule 532 specifically makes provision for the compulsory contents
of a trust deed. After approval of the trust deed by the Commission,
the trust deed must be duly executed and stamped by the Federal
Internal Revenue Service
9.3.

Minimum Subscription; Asset Allocation;

9.3.1. The requirements of Minimum Subscription and Asset Allocation in

Rules 538 and 539 are materially the same, save for the
requirement in Rule 538, which provides that where an offer is
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aborted and the monies to be returned to the subscribers are not

in compliance in Rule 105(which requires that monies due to
subscribers or purchasers of securities be returned to them within
5 working days of the approval of the securities or within such
other time as may be approved by the Commission), accrued
interest shall be paid to the unsuccessful applicants at a rate not
below CBN MPR +5%.
9.4.

Valuation Reports; Quarterly Reports and Insurance

9.4.1. The requirements for the above in Rules 540, 541 and 542 are the
same

with

the

requirements

under

REITs

constituted

as

companies. It is also important to mention that the Rules have no

provisions for the borrowing limits for REITs constituted as trusts.
10.

TAXATION

10.1. In what appears to be an adoption of international best practice, REITs

are mandated to share 90% of their profit to the unit holders of the
scheme as dividend. In jurisdictions such as the United States REITs do
not pay tax because they are seen as pass through entities i.e. entities
that are mere investment intermediaries.
10.2. Section 23(f) of the Companies Income Tax Act grants tax exemption
to the dividends distributed by Unit Trusts (which are basically the same
with REITs by the definition provided in Section 17 of CITA). When a
unit holder receives the dividends, such unit holder will be taxed based
in the provisions of the Personal Income Tax Act.
10.3. Notwithstanding the lofty provisions of Nigerian Law with regard to
REITs, a problem arises when REITs constituted as companies or those
that are deemed to be constituted as companies are taxed based on the
profits/dividends that they receive on behalf of their shareholders/unit
holders who will also be taxed when they receive their dividends. The
Commission is currently working on a review of some of the provisions of
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CITA so that REIT entities will be seen as pass-through entities that are
merely investing the pool of funds contributed by individuals.

11.

CONCLUSION

11.1. As the Nigerian investment clime becomes more accommodating, new

investment concepts are introduced into our legislative system. The
introduction of REITs in Nigeria and the development of a specific
framework for it further encourages investment in real estate by
individuals who would otherwise be unable to afford it.
11.2. In the Nigerian REIT industry today, the REITs available are all
closed-ended, meaning that they are quoted on the Nigerian Stock
Exchange and units of such funds can only be bought or sold on the
floor of the stock exchange. Some of the existing REITs in Nigeria
include the Skye Shelter Fund, Union Homes REIT and the Union
Property Development Company REIT.

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