Saturday, 29 October 2016

INVESTMENT OF PENSION FUNDS AND IDLE FUNDS IN HOUSING DEVELOPMENT: THE ESTATE SURVEYOR AND VALUERS PERSPECTIVE ~ ESV. CHUDI UBOSI, FNIVS

ESV. Chudi Ubosi, FNIVS
INTRODUCTION
The Pension Reform Act 2014 is a follow-up to the repealed Pension Reform Act No. 2 of 2004. In a nutshell it outlines how pension funds should be collected, how the collected funds should be managed by the operators etc and the role of the regulatory body in ensuring compliance, integrity accountability, and corporate governance in the pension funds administration.

Part of the provisions of the Act prescribes the investment of these funds in various income yielding ventures; including investment in real estate. With reference to real estate in Nigeria, there is a critical shortfall in the available housing with the resultant effect that demand for housing far outstrips supply by a ratio of nearly 1 – 10. This paper will examine the provisions of the Pension Reform Act 2014, the state of housing development in Nigeria, and the role of the Estate Surveyor and Valuer in helping the Pension Funds Administrators operate effectively, efficiently and transparently.

THE PENSION REFORM ACT OF 2014
The Pension Reform Act of 2014 was a follow up to the repealed Pension Reform Act No. 2 of 2004 and its main broad objective amongst others was to ensure a uniform set of rules standards etc for the operation of pension funds both in the public and private sector. Sections 1 and 2 of the Act are quite explicit in this regard.

The modus operandi was to be by way of a contributory sum deducted from employees emoluments as well as an equal counterpart contribution from the employer. These contributions are to be made to a chosen pension fund administrator who would then domicile and invest same on behalf of the beneficiary. Upon retirement from active service or upon attaining the age of 50 years, the holder shall be able to access the benefits based on certain criteria.

The duty of the National Pension Commission is to oversee the PFA’s and PFC and ensure integrity, accountability and transparency in the management of these contributed funds.
In the area of the use and investment of the funds, Section 86 outlines the various investments to which the pension funds can be put. These include government bonds and securities, shares in public limited companies, bank deposit investments etc. Of particular interest to us as real estate professionals is Section 86 (h) which stipulates that the funds can be invested in real estate developments.

Regarding investments in real estate, the National Pension Commission released guidelines (September 2011) regulating such investments by Pension Fund Administrators (PFA) and Closed Pension Fund Administrators (CPFA). Section 1.3 of these guidelines stipulates amongst others that only CPFA’s can make direct real estate investments, i.e. purchase of an already developed property or financing the development or construction of a property to generate income for the pension fund. A Closed Pension Fund is one that is limited to the employees/members of the funds sponsors. The sponsors of a closed pension fund maybe the employer, a union or an association eg. Chevron, Shell etc. The regular or open Pension Fund on the other hand is open to all persons that show interest in joining them.

The guidelines went further to outline conditions for purchase, sale etc of real estate investments. Also stated were the roles Estate Surveyors and Valuers should play in the administration of pension funds and their real estate investments especially in the area of valuations.

STATE OF HOUSING DEVELOPMENT IN NIGERIA
Before we go further to appraise the investment of pension funds in real estate developments and the role of the Estate Surveyors and Valuers, it is important to give an overview of housing and real estate investment in Nigeria. According to Marslows hierarchy of needs, housing is one the most important of mans needs. In Nigeria the meeting of this need is faced with numerous challenges. Given its population of about 180 million, Nigeria is the most populous nation on the African continent. It is interestingly one of the most rapidly urbanizing countries in Africa. Over 48% of Nigeria’s population lives in urban areas. This approximates to less than 10% of the habitable land areas.

The National Population Commission (NPC) estimates that Nigeria’s annual population growth rate of slightly over 2% and an annual urban population bulge rate of about 4% skews population distribution towards the urban areas, towns and cities. The largest economy of Africa, Nigeria, currently faces a national housing deficit of about 17 million units. Let us paint a little picture here, in 1991; the housing deficit was at 7 million units, rose to 12 million units in 2007, spiked to 14 million units in 2010 and it is now 17 million units.

The current housing production in Nigeria hovers around 100,000 units per annum, barely scratching the surface of the housing needs for a country of about 180 million. To meet this national housing deficit, at least 700,000 additional units would be needed each year.

According to a World Bank report, bridging this 17 million national housing deficit would gulp approximately N59.9 trillion. The flip side of this is that there are gargantuan and untouched investment opportunities in Nigeria’s real estate sector, which contributes an abysmal 1.3% of Nigeria’s rebased Gross Domestic Product (GDP).

Lagos currently has the most vibrant property market in Nigeria; however home ownership is still at less than 20%. Statistics show that Lagos receives a net figure of approximately 1,500 new settlers daily, but the housing supply has failed to keep up with the rapid urbanization and population expansion, especially in the low income market. The housing demand estimate is put approximately at 4.4 million units while the estimated current supply of housing in the state is 1.42 million units; leaving a gap between housing demand and supply at roughly three million units.

WAY FORWARD.
Based on the guidelines for investment in real estate only CPFA’s can invest directly. The PFA’s can, as it were, invest in real estate investment trust (REITS). This means that they can acquire part interest in same. The challenge with the Nigerian environment is that the conditions for establishing REITS are so onerous that currently there are only 2 existing – UPDC and Union Homes. Compare this to South Africa with 33 real estate investment trusts and even a developed market like the United States with 1100.

The absence of REITS in itself has seriously limited the ability for the investment of pension funds in the real estate sector. Moreover, the existing REITS have tended to focus on the upper end of the real estate investment echelon. Their impact on the housing stock has been minimal. Though the pension funds are not cut out to be social service providers the truth is that so much investment is needed especially at the lower end of the real estate pyramid where the demand far outstrips supply and where the greatest impact is most likely to be felt by the majority of Nigerians.

Data available indicate that as at 2009 investible pension funds stood at N1.50 trillion, 2012 – N2.90 trillion, 2013 – 3.82 trillion and as at 2015 N5.60 trillion. Despite this huge reservoir of funds, the PFA’s are only permitted an investment of 15% of these investible funds in real estate and maybe with a little financial engineering up to 20% of it, should infrastructure be included. The implication of this is that as at 2015 over N800bn was available for real estate investments. Properly invested, this sum would make a major impact on the housing deficit if targeted at the right sector and locations of highest need.

With the over N800bn available for real estate investment and the obvious lack of investment outlets, the PFA’s should begin or be permitted to invest in mortgage backed securities. One of the biggest challenges of housing development and purchase in Nigeria is the absence of a mortgage system. What currently exists now and is touted as mortgages are purely commercial loans.

There is a need to create a mortgage industry in Nigeria to reduce or totally eradicate the need to purchase real estate investments on a cash and carry basis. A well structured or developed financial product using funds from pension contributions could easily provide long term mortgages for as little as 5% per annum payable over 20 – 25 years. Social scientists have theorized that the provision of mortgages for home purchase, would go a long way in reducing the corruption which plagues our nation.

From the Estate Surveyors and Valuers perspective, we would advocate a greater use of professionals in real estate investments. Data is not readily available as to how much the Estate Surveyors and Valuers are doing with the PFA’s even in the area of valuations which has been stated in the guidelines. We however ask for a greater role in the areas of asset acquisition, sales, feasibility and viability studies, project and facility management etc. In fact, section 57 (d) refers to collection of rental income which falls within the purview of Estate Surveyors and Valuers.

The writer would also want to recommend for the removal of the regulation limiting direct real estate investment, and/or also allow the PFA’s increased percentage investment of their investible funds. One would also wish to suggest that the legislation barring investment by PFA’s be reviewed to allow them invest in CPFA’s which though indirect will equate to further investment in housing. All this will have the overall effect of increasing investment and will impact positively on the housing industry and all stakeholders including the Estate Surveyor and Valuer.

CONCLUSION.
In conclusion, it is clear that regarding pension funds and its investment in housing development, a lot more still needs to and can be done. It is obvious that the strict guidelines for real estate investments by PFA’s is primarily to ensure and ingrain accountability, but it is significant to remember that real estate remains one of the best investment options available.

This is not farfetched when one examines the characteristics of real estate – stationary, appreciation with time, secured and visible, long term, hedge against inflation – rental income, capital appreciation, rate of tax on real estate return is moderate compared to other investments etc. As mentioned earlier one of the best ways to ensure this integrity and accountability in investment is to use the services of the Estate Surveyors and Valuers who is best suited and has been trained for this purpose.

And indeed as the pension funds invest more in real estate, the role of the Estate Surveyors and Valuers can only increase. The direct and indirect impact of this increased investment will include all stakeholders in the construction and allied industries and in the long run the overall national economy would be the ultimate beneficiary.

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