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| 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follow-up to the repealed Pension Reform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Pension Reform Act of 2014 was a follow up to the repealed Pension Reform Act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.
Do
you have properties that you urgently need to sell? Tectono
Business Review can help you out. For more information, click on this
link:
http://www.tectono-business.com/2016/06/are-you-estate-surveyor-or-property.html
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