Pension fund: A bride in-waiting for real estate industry —Ogunniran

Mr Hakeem Ogunniran, a former Managing Director, UACN Property Development Company (UPDC), is the Chairman of the Board, Lagos Building Investment Company (LBIC) Plc and Founder/Chief Executive Officer, Eximia Realty Company Limited. He spoke on some fundamental issues affecting   mass and reasonably priced housing units in the country during a virtual workshop on: Financing Affordable Housing Development in a Depressed Economy organised by the Association of Housing Corporations of Nigeria (AHCN) in Abuja. DAYO AYEYEMI, who monitored the event, reports.


Comments on housing sector 

WE are still building houses. We have to start manufacturing houses; we have to commoditise houses; we have to be able to buy and sell houses the same way we buy other products. That is the only way to make a lot of progress that we all desired.


Issues with affordable housing

Part of the issue is funding.  Pension fund as at the end of last year stood at N12.8 trillion. There is an allotment to real estate between five and 20 per cent. If we have access to just 10 per cent of Pension fund, you can imagine what it can do to the industry. There are significant reforms in the past two years which have created the right framework. We need to do it in a very organised, intelligent and logical manner. It is doable. I recently had a chat with the Real Estate Developers Association of Nigeria (REDAN)’s President; sharing my thought on how we can create the right vehicle that we need. One thing we must understand is that Pension fund cannot be invested directly in housing by the rules. But the management of the Pension fund is permitted to invest in certain asset classes. If you look at section eight of 2019 Regulation, it defined the various assess classes. There are five funds. All the five funds specify all the asset classes you can invest, and real estate features under this. The allowable limit is between five to 25 per cent. So Pension fund is a bride in waiting.


How we can drive the initiative in that respect?

The financial options are the money and capital markets. Banks have always taken the view that real estate in a medium to long term investments. So when I see those who borrowed short-term to finance real estate, my heart always beats. There have been a lot of recent reforms-the Real Estate Investment Trust (REIT) option.


What we need to do

First, affordable housing requires medium to long term funding. Total gestation period is 12 to 48 months for special consideration pricing because the return on affordable housing is not always competitive. Maybe you struggle to deliver between four and six per cent. It is below inflation. So every investor looks for alternative. We need to be able to create risk and similar asset classes.

Under the Security Exchange Commission (SEC)’s regulations, a real estate investment scheme is defined as a REICO – Real Estate Investment Company, a REIT or any other structure that the commission may approve from time to time. So, that flexibility has been built into the regulations. My view is that a cooperative can meet all the variables, or limited partnership. I am currently working on something. You can pull some people together and because of the flexibility in the regulations, you can build a framework around either a cooperative or a private partnership because it is important to understand the underpinning of the regulation. Once you do that, there will be some challenges, but you can create your asset class in line with the regulations and be able to move on. There are some things that drive investments. Some factors have a pull effect – returns, yields vis-a-vis the security.

In 2016-2018 when the Treasury Bills are going for 20 per cent, it will be difficult to convince any investment manager to invest in real estate because if you have a risk-free type of investment, you don’t want to stick your fund on real estate where you are dealing with Omooniles and approval issues, etc. We must remember that there are these factors that have pull effects.

Part of the challenges of real estate is liquidity. You have to be able to exit when you need funding. There are issues of size, scalability and legal.


Accessing Pension Fund

The limit per issuance is between 15 to 25 per cent. If as an industry we can come together and create asset framework that is able to access five to 15 per cent of that. The money is there, there are special allocations for specific sectors including real estate. Pension fund is a bride waiting to be married by real estate industry. We have to think through on how to create those asset classes. We have to create room to create REIT assets for real estate. This can be done if we understand the significance of assessing the capital.


Industry challenges

One of the challenges of this industry is that we are all just working in pockets all over the place. REDAN is doing its own, Association of Housing Corporations doing its own and so for individuals. I am a strong apostle of mini-collaboration. I have done like eight Joint Ventures (JVs). To access Pension fund, we need to think outside the box. In fact, I belong to the school of thought that we should break the box. We need to work together and create a unique asset class. It is doable. We are to be more creative and this can be done if we work together.


Housing finance options

We should be looking for long-term fund for real estate. Money market is largely unsuitable, the tenors are short. If you take a look at your loan’s letter, it has variable interest rates. You have to take particular attention to understand what you are signing into. Securitisation is a big problem – it is complex, cumbersome and expensive.  I did a transaction long time ago and in all, we signed 30 agreements.  I signed all manner of agreements. In fact, it almost became a full time work. It is susceptive to macro volatility. In many countries, the capital market is supposed to be pillar of long-term funding mobilisation and capital formation. There is a general awareness now.

In 2006, we issued the Bond in my previous life at 10 per cent, moratorium of one year, and as a real estate person, when you have access to such fund, you have five years to play around with the fund. We need to start re-orientating ourselves and look at these various options. REIT option brings some significant benefits to the market. It helps to mobilise capital, it helps to unlock values in the existing assets.


Property investment 

In this country, we are very good at property development and management, but we are very poor at property investment. When you build your first asset, you should not struggle again; you should have a way of creating a vehicle and sell the cash flow from your current asset to somebody else-bringing in your funding. You should not struggle for funding anytime you are starting a new project.


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