The real estate investment and finance markets in most developing countries are generally undeveloped, and Ghana is no exception. Housing for instance is usually financed by individuals and households using “sweat equity” over a period of time, often between 5 to 15 years for the average Ghanaian. In contrast, mortgage finance is available and relatively cheaper and easy to access in most developed economies like the US, UK, and Denmark. Besides the institutional changes (legal, information, economic, cultural and religious, e.t.c), affordability problems and macroeconomic instability, the scarcity of long-term sources of funding remains a hurdle in the quest to developing well-functioning real estate investment and finance markets, which are characteristically capital intensive. Innovation is in view and we have now reached an era when it is possible to contribute and create the conditions to establish a well functioning real estate investment market acting on several issues and establishing some critical tools useful for this development. In particular, the establishment of a REIT regime may be useful to offer an investment platform that is currently underdeveloped and almost missing in the market.
A REIT is an acronym for “real estate investment trust’, which is either a publicly or privately traded company that mainly hold real estate assets for investment purposes and, after paying 90–95% of profits in dividends and meeting some requirements, they obtain an exemption from corporate taxes. For this reason, these vehicles may be attractive to not only local investors but also to foreign private and institutional investors considering investing in Africa’s real estate and Ghana’s real estate in particular. Currently, the HFC REIT, which was established in the early 2000s is the only of its kind in Ghana. The HFC REIT has been pivotal in funding the mortgage lending activities of the HFC bank, which hitherto was the market leader.
REITs are important for many reasons. First, a well functioning investment market is normally built on the separation between ownership and use of assets. Thus, non-real estate companies §such as banks, insurance companies, and manufacturing firms beside others that own their own offices and industrial buildings may realise the potential of sale and lease back deals through which they could free important amounts of capital to be reinvested in the core-business. Second, varieties of REITs such as mortgage REITs, equity REITs and hybrid REITs would expand the investment universe for investors, especially institutional investors like pension funds and insurance companies that have long-term investment horizons. Third, given the high standards required for the assets to be included in their portfolio, this may also lead to a renovation of the real estate stock which may represent an opportunity for value added investors. Last but not the least, for small investors who are interested in real estate returns but cannot meet the capital requirements, REITs offered them an opportunity to own a share in the real estate company.
The investment supply problem is often a legal one. Even though, REITs may be useful for real estate investment and finance market development, it lacks a legal framework in Ghana. In 20012, the Director-General of the Securities and Exchange Commission (SEC) noted a move by his outfit to establish the rules and regulations to develop the Real Estate Investment Trusts (REITs) industry to create a strong link between the capital market and the real-estate sector, which is yet to materialized. It is worth-noting that while the development of the real estate sector is fundamental to a country’s development, finance and investment is the grease of the development wheels. REITs therefore have a strategic role for developing the needed finance.
Dr. Kenneth Appiah Donkor-Hyiaman
The author is a Real Estate Consultant, Researcher, Lecturer, and Managing Partner at MeTis Brokers (a private equity real estate investment and management firm).