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© 2015 RebelGroup – Confidential
Background to REITs in Affordable Housing 10 May 2017
REITs and Housing Finance Seminar: East Africa
© 2016 RebelGroup South Africa – ConfidentialSlide 2
Concept Presentation
•• Defining characteristics and investor benefits of REITs in general•• Residential property as an investment asset in the context of REITs•• The experiences of developed markets with REITs in affordable housing•• Implementation of the REIT structure across Africa
Case Study Presentation
•• Experience of Watumishi Housing Company REIT (Tanzania)
Analysis Presentation
•• Lessons from the case studies•• The critical enabling conditions for REITs in Africa•• Challenges facing residential REITs in Africa•• Approaches to increasing the financial viability of affordable housing REITs in
Africa
© 2016 RebelGroup South Africa – ConfidentialSlide 3
Table of Contents
Background to Study
Defining Characteristics of a REIT
Residential REITs
REITs in Affordable Housing
REITs in Africa
© 2016 RebelGroup South Africa – ConfidentialSlide 4
Background to Study
Key challenge for policy makers: to improve housing delivery value chains in a way that broadens access to finance for housing developers.
Failure to provide investors with substantial &
accessible targets in the residential real
estate
Struggle to attract and retain significant
investment
Limited financial resources being
channelled towards Africa’s housing
developers
Limited Housing Finance Markets in Africa:
© 2016 RebelGroup South Africa – ConfidentialSlide 5
Background to Study
What is the REIT structure, and how could it be applied in the context of affordable housing?
How has the REIT structure evolved to meet Africa’s housing finance and delivery needs?
What are the challenges and opportunities facing affordable housing REITs in Africa?
Exploring innovative approaches for channelling investment into affordable housing across Africa
© 2016 RebelGroup South Africa – ConfidentialSlide 6
Table of Contents
Background to Study
Defining Characteristics of a REIT
Residential REITs
REITs in Affordable Housing
REITs in Africa
© 2016 RebelGroup South Africa – ConfidentialSlide 7
Defining Characteristics of a REIT
What is a REIT?l Owns & manages a portfolio of mortgages /
real estate propertiesl Rules and regulationsl Allows investors to invest in portfolios of
mortgages or large-scale propertiesl Shareholders earn share of the income
stream
What are the distinguishing factors?l Aggregate diverse sources of fundingl Preferential tax treatment l High rates of profit distributionl Raise finance from investors who lack
access to real estate markets
History of the REIT
• REIT structure first established in 1960 in the US.
• Aim: provide average investor with a way to participate in property market.
• US government agreed to provide preferential taxation treatment for REITs.
• Agreed that REITs would have to comply with specific regulations.
• Succeeded in changing the investment landscape in the US.
© 2016 RebelGroup South Africa – ConfidentialSlide 8
Mortgage REIT's
Operations
REIT raises equity and
debt finance
REIT buys mortgages /
MBS
REIT earns interest income
REIT pays interest
income out as dividends
The Shareholders' Perspective
Investors buy shares in the
REIT
Investment transferred
into mortgages /
MBSs
Investors receive
returns on their
investment
Defining Characteristics of a REIT
Mortgage REITs versus Equity REITs
Equity REITs' Operations
REIT raises equity and
debt finance
REIT acquires / develops properties
REIT leases out and
manages its properties
REIT pays rental income
out as dividends
The Shareholders' Perspective
Investors buy shares in the
REIT
Investment transferred
into real estate assets
(Investors not involved in
portfolio management)
Investors receive
returns on their
investment
© 2016 RebelGroup South Africa – ConfidentialSlide 9
Defining Characteristics of a REIT
Traditional Property Development Company
Equity Real Estate Investment Trust
Few private investors or multiple investors Multiple private and institutional investors
Sells the properties that they develop Collection of rent on properties that they own for the long-term (most countries)
Pays corporate tax on net income Exempt from corporate tax (most countries); Preferential corporate tax (few countries)
Pays capital gains tax Exempt from capital gains tax (most countries)
Pays stamp duty & transactions tax Exempt from / subject to concessions on stamp duty & transaction tax (some countries)
Invests in any type of asset class Only invests in real estate (most countries)
Retains / reinvests portion of net profits Pays out majority of net income (most countries)
May or may not be listed on the stock exchange
Achieves liquidity and transparency through listing on the stock exchange (most countries)
© 2016 RebelGroup South Africa – ConfidentialSlide 10
Defining Characteristics of a REIT
REITs' Operations
REIT raises equity and
debt finance
REIT acquires investment
portfolio
REIT manages investment
portfolio
REIT pays rental / interest income out as
dividends
The Shareholders' Perspective
Investors buy shares in the
REIT
Money transferred into
investment assets
(Investors not involved in
portfolio management)
Investors receive returns
on their investment
The Regulatory Framework
Debt/Equity ratio restricted
Only real estate assets; development
restricted
REIT must distribute
majority of its net income
Tax Transparency
Exempt from capital gains
tax
Distributable income is tax
deductible
Benefits to Investors
Liquidity & transparency; reduces risk
Diversification; stable source
of income
High and consistent
income
© 2016 RebelGroup South Africa – ConfidentialSlide 11
Table of Contents
Background to Study
Defining Characteristics of a REIT
Residential REITs
REITs in Affordable Housing
REITs in Africa
© 2016 RebelGroup South Africa – ConfidentialSlide 12
Residential REITs
REITs are classified according to the type of property that they invest in.
Traditional property types = office, retail, residential and industrial property.
Focused REITs invest exclusively in one type of property.
A residential REIT is a type of focused REIT, which invests exclusively in residential properties, and
traditionally owns and often manages these properties.
Diversified REITs’ portfolios incorporate a variety of property types, and may include residential property
together with other types of property.
© 2016 RebelGroup South Africa – ConfidentialSlide 13
Residential REITs
Residential property, as an investment asset, is associated with distinct strengths and weaknesses. According to the international literature…
•• Development potential•• Stability of income•• Capital value stability•• Lower obsolescence•• Inflation-hedging
effectiveness
Strengths
•• High costs of housing management
•• Insufficient market size•• Illiquidity•• Reputational risk•• High taxes•• Insufficient market
information
Weaknesses
© 2016 RebelGroup South Africa – ConfidentialSlide 14
United States
•• 2nd largest REIT sector
•• 15% of the equity market capitalisation
•• Doubled in number since 1980
•• Average return of 23.2% per annum
Canada
•• 3 residential REITs
•• 2 of top 10 REITs are residential
•• 500 properties with over 87,000 apartments
Japan
•• 2nd largest REIT sub-sector
•• 14% of market capitalisation.
•• 11 residential REITs; 5 J-REITs with significant residential components
Other
•• Singapore and France
•• Emerging countries: South Africa, Nigeria and Tanzania
Residential REITs
Residential REITs are proving to be an increasingly popular vehicle for investment in a number of countries…
© 2016 RebelGroup South Africa – ConfidentialSlide 15
Table of Contents
Background to Study
Defining Characteristics of a REIT
Residential REITs
REITs in Affordable Housing
REITs in Africa
© 2016 RebelGroup South Africa – ConfidentialSlide 16
Macro-economic level:
- transparent, well-regulated, tax-
efficient
- stimulates additional capital flows
- positively impacts the job market and
business dynamism of an economy
Microeconomic level:
- Channels professionally managed
capital into the delivery and operation of
the built environment
- Residential REITs = mechanism for
increasing quality, supply and
affordability of residential properties
REITs as a vehicle for development
REITs in Affordable Housing
© 2016 RebelGroup South Africa – ConfidentialSlide 17
REITs in Affordable Housing
Existing research has been undertaken in developed countriesl ‘Affordable housing’ = housing provided for low-income or disadvantaged householdsl Emphasis on challenges e.g. low rentals and low returnsl Newell & Lee (2014) analyse risk-adjusted performance of social housing in Netherlands
Cannot be directly compared with affordable housing in African contextl ‘Affordable housing’ = market segment affordable for the majority of the population l Not necessarily subsidized l Implications for the risk-reward profile (and thus viability) in Africa
Asset class Average annualreturn Annual risk Sharpe ratio Performance rank
Bonds 3.7% 1.12% 1.18 1Property 7.49% 5.31% 0.96 2Listed property 4.7% 4.01% 0.58 3Social housing 4.3% 4.53% 0.43 4Shares 2.1% 24.8% -0.01 5
© 2016 RebelGroup South Africa – ConfidentialSlide 18
REITs in Affordable Housing
Examples of Affordable Housing REITs in developed countries…
•• Partnership with 12 non-profit housing providers•• Mission: positively impact communities by preserving the stock of
affordable rental•• Timely access to financing•• Spectrum of investors: impact investors à economic investors
Housing Partnership Equity Trust
(US)
•• Purpose: acquire unsubsidised rental properties that need capital improvements; introduce professional management
•• Smaller rental apartment buildings with communal facilities•• Investors = pension funds, foundations and high net-worth
individuals
Responsible Residential Investment(Canada)
•• Development and provision of social housing stock via registered social landlords (RSLs) and local authorities
•• Mission: reduce the cost of housing; provide a safe and ethical fund for investors
•• Raises capital from institutional investors & the capital markets.
Houses for Homes
(UK)
© 2016 RebelGroup South Africa – ConfidentialSlide 19
Table of Contents
Background to Study
Defining Characteristics of a REIT
Residential REITs
REITs in Affordable Housing
REITs in Africa
© 2016 RebelGroup South Africa – ConfidentialSlide 20
REITs in Africa
CountryYear of Establishment
No. of Registered REITs
Size of Industry
Primary Sectors
Ghana 1994 1 US$12.6 millionResidential;
Commercial
Nigeria 2007 4 US$224 millionResidential;
Commercial
Tanzania 2011 1 US$40 million Residential
South Africa 2013 30 US$16.1 billionResidential;
Commercial
Kenya 2013 1 US$35.5 million Commercial
Rwanda 2013 0 n/a n/a
Morocco 2015 / 2016 1 n/a Commercial
© 2016 RebelGroup South Africa – ConfidentialSlide 21
Residential REITs in Africa
© 2016 RebelGroup South Africa – ConfidentialSlide 22
REITs in Africa
Country Management Style
Minimum Investment in Real Estate
Development Gearing Limit
Minimum Dividend Pay-out
Corporate Income Tax Exemption
Ghana Internal n/a Allowed None None No
Nigeria Internal 75% Allowed 15% 90% No
Tanzania External 50% Maximum 10% of total assets None 90% No
South Africa
Internal / external 75% Allowed 60% 75% Yes
Kenya External IREIT: 75%DREIT: 35% Allowed
IREIT: 35%DREIT: 60%
IREIT: 80%DREIT: Optional
Yes
Rwanda External 100% Not allowed 20% 90% No
Morocco External 70% n/a n/a n/a Not yet
© 2016 RebelGroup South Africa – ConfidentialSlide 23
REITs in Africa
Case studiesl Demonstrate the potential of the
REIT model in the context of residential development
l Geographically spread across Africa
l Desktop analysis and interviews
HFC REIT (Ghana)
Union Homes Hybrid REIT
(Nigeria)
WatumishiHousing
Company (Tanzania)
IndluplaceProperties
(South Africa)
Case Studies
What was the regulatory context in which the REIT emerged?
What is the profile of investors engaged in the REIT?
What conditions and drivers allow for the REIT to work?
What have been the challenges that the REIT has faced?
© 2016 RebelGroup South Africa – ConfidentialSlide 24
Concept Presentation
•• Defining characteristics and investor benefits of REITs in general•• Residential property as an investment asset in the context of REITs•• The experiences of developed markets with REITs in affordable housing•• Implementation of the REIT structure across Africa
Case Study Presentation
•• Experience of Watumishi Housing Company REIT (Tanzania)
Analysis Presentation
•• Lessons from the case studies•• The critical enabling conditions for REITs in Africa•• Challenges facing residential REITs in Africa•• Approaches to increasing the financial viability of affordable housing REITs in
Africa
Going Forward
© 2016 RebelGroup – Confidential
Advisory
Implementation
Investment
R O T T E R D A M
A N T W E R P E N
J O H A N N E S B U R G
M A N I L L A
W A S H I N G T O N
RebelGroup Advisory SA
Contact person: Nadia Kruger-Levy
2nd Floor, West Wing, 158 Jan Smuts Avenue, Rosebank, Johannesburg, South Africa, 2196T +27 010 591 1232F +27 88 011 447 0272M +27 82 770 2616Email:. Nadia.Kruger-levy@rebelgroup.com
REITs in Africa report available at:http://housingfinanceafrica.org/app/uploads/CAHF-Real-Estate-Investment-Trusts-Study-2017.02.pdf
Contact
Centre for Affordable Housing FinanceContact person: Sireena Ramparsad
2nd Floor, West Wing, 158 Jan Smuts Avenue, Rosebank, Johannesburg, South Africa, 2196T +27 (0) 11 447 9581Email:. sireena@housingfinanceafrica.org
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