The Decline of REITs and the Rise of Direct Real Estate Investment in Nigeria’s Pension Fund Landscape
The Nigerian real estate market has witnessed a significant shift in investment patterns within the pension fund sector. The Pension Fund Operators Association of Nigeria (PenOp) has highlighted a substantial decline in investments in Real Estate Investment Trusts (REITs) over recent years, accompanied by a corresponding surge in direct real estate investments. This dynamic reflects a complex interplay of market factors, regulatory guidelines, and investor preferences.
REITs, which pool investor capital to purchase and manage income properties and mortgage loans, have traditionally offered a convenient avenue for pension funds to participate in the real estate sector. However, PenOp’s analysis reveals a stark decline in REIT investment from a peak of N239.28 billion in 2020 to a mere N20.06 billion in 2024. This downward trend, punctuated by a particularly sharp drop in 2022, underscores a critical challenge: the scarcity of available REITs on the Nigerian Exchange Limited (NGX). This scarcity has forced pension fund managers to seek alternative avenues for real estate exposure, particularly through private equity funds.
In contrast to the dwindling fortunes of REITs, direct real estate investment has experienced remarkable growth. PenOp data reveals a substantial increase in direct investment, reaching N273.06 billion in 2024, compared to a modest N5.13 billion five years prior. This surge reflects a strategic shift by pension fund managers, particularly those managing "closed" pension funds, towards direct property acquisition and development. This approach allows them to bypass the limitations imposed by the scarcity of REITs and potentially achieve higher returns.
The divergence in investment trends between REITs and direct real estate is partly explained by regulatory guidelines governing pension fund investments. While "active" pension funds are restricted from direct real estate investment, they are permitted to invest in REITs. Conversely, closed pension funds and those operating defined benefit schemes are authorized to engage in direct property investments. This regulatory framework has channeled a significant portion of pension fund capital towards direct investment, contributing to the observed growth in this segment.
The combined investment in real estate, encompassing both REITs and direct ownership, totaled N293.12 billion in 2024, representing a substantial increase compared to the previous year. This signifies the continued importance of real estate as a core asset class for Nigerian pension funds. Real estate investments offer several advantages, including a hedge against long-term inflation and a stable source of income. Furthermore, they provide developers with access to long-term capital, fostering growth and development within the real estate sector.
The current landscape of REITs in Nigeria features a limited number of players listed on the NGX. These include SFS Real Estate Investment Trust, UH Real Estate Investment Trust, and UPDC Real Estate Investment Trust. UPDC REIT currently holds the largest market capitalization among the three. The limited number of listed REITs further reinforces the scarcity issue contributing to the decline in REIT investments by pension funds. This situation underscores the need for greater diversification and expansion of the REIT market to attract more pension fund investment and provide a wider range of real estate exposure options.
The observed shift in investment patterns within the Nigerian pension fund sector has significant implications for both the real estate market and the overall economy. The decline in REIT investment underscores the need for regulatory and market-driven initiatives to revitalize this segment. Simultaneously, the growth in direct real estate investment highlights the importance of robust regulatory oversight to ensure prudent investment practices and mitigate potential risks. The future trajectory of these investment trends will play a crucial role in shaping the development of the Nigerian real estate market and its contribution to the national economy.
