REITs as an alternative financing option

ACCORDING to McKinsey & Co, Africa faces serious infrastructure gaps. Most of Africa lags the rest of the world in coverage of key infrastructure classes, including energy, road and rail transportation, and water infrastructure.

In a country like Zimbabwe, funding infrastructure projects has been a major cause of concern given the limited fiscal space on the part of the government.

Piggy has also noted that rural-to-urban migration in Zimbabwe has led to a significant demand for affordable housing.

According to the Africa Housing Finance Yearbook (2021), the unaffordability and unavailability of mortgage finance in Zimbabwe has been the limiting factor for aspiring home buyers.

The housing backlog in urban areas is estimated at 1,3 million concentrated within the high-density sector.

Piggy contends that there is sizeable land available for development in Zimbabwe’s urban centres. There are also several proposed new developments for shopping malls, hotels, retail and industrial parks, offices and residential complexes predominantly promoted by private developers who appear to be more willing to take the risk. 

However, there is need to adopt innovative finance structures that can unlock the intrinsic value of property in Zimbabwe. There is indeed an opportunity to use Real Estate Investment Trusts (REITs) as an alternative financing option for commercial infrastructure projects in Zimbabwe.

A key distinguishing factor of REITs is the way they aggregate diverse sources of funding and target them into real estate portfolios that extend beyond the limitations of individual projects.

REIT regulations and legislation providing for preferential tax treatment and requiring high rates of profit distribution constitute additional factors that differentiate REITs from other property investment and financing vehicles.

In Zimbabwe, there are two ways of going about listing a REIT. The first option would be for the issuer to use funds raised through an Initial Public Offering (IPO) to acquire existing real estate or develop it from scratch.

Alternatively, the issuer could attach their existing property to the REIT and generate income from it.

REIT structures

Overall, REITs are a powerful instrument that can promote the investment in infrastructure. Several economic models demonstrate that infrastructure investment has a positive impact on economic growth and development. 

This suggests that the government and private sector should invest more in this sector as it has the potential to increase the growth rate of the economy. 

The private sector investment rate also effects economic growth positively indicating a need for policy measures which will give incentives to the private investors to invest more through REIT structures.

Internationally, the REIT structure has proved to be an effective mechanism for attracting retail and institutional investment capital into global real estate markets.

While the nascent REIT market in Africa has demonstrated the need for certain enabling conditions to be in place before REITs can thrive, it has also confirmed the huge potential that such a mechanism has for channelling investment into African real estate markets.

In addition, the pressure facing the national budget and lack of access to debt markets, mean REITs have become a more important option than ever before. A coherent framework that systematically identifies REITs as a financing option should bring private sector knowhow and capital to maximise the value for money delivered by infrastructure projects.

The Tigere Property was the first REIT listing in Zimbabwe and more should be expected. Piggy believes that REITs stand out as superior property investment vehicles given that they enable investors to hold highly illiquid real estate assets while simultaneously enjoying the marketability and liquidity advantages of traditional stock market assets.

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Matsika is the head of research at Morgan&Co, and founder of — [email protected]/ [email protected] or +263 783 584 745.

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