Capital market offers real estate developers cheaper options amid funding challenges | Prestige Real Estate News

Capital market offers real estate developers cheaper options amid funding challenges


EDIDIONG IKPOTO examines how property developers could take advantage of the capital market to raise construction finance

In 2022, the subscribers of the ill-fated skyscraper, which collapsed on Gerrard Road, Ikoyi, Lagos, instituted legal action against the Lagos State Government for attempting to take over the property.

The claimants argued that any compulsory acquisition of the property by way of forfeiture in favour of the Lagos State Government would amount to rewarding the government, making it take benefit from the negligence of one of its agencies and in complete disregard of the equitable interest of the applicants, which was worthy of protection by the court.

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The kernel of the suit by the subscribers to the ill-starred project stemmed from the loss incurred after the collapse of the building.

Like most commercial construction projects in the country, the building was financed primarily via subscriptions from subscribers; hence, the moment the developer, Mr Femi Osibona perished in tragic circumstances beneath the debris of the collapsed building, recovering the investments was going to be a tall order.

The instance of this case-in-point puts the spotlight on the underlying problem property developers in Nigeria face vis-à-vis construction finance, despite the veritable platform provided by the capital market.

While commercial banks and financial institutions in Nigeria have been known to offer construction loans for property development, property developers have often found it difficult to raise funding through this option due to high-interest rates and strict criteria attached to it.

Another means through which property developers have resorted to raising capital is crowdfunding, which allows individuals to diversify their investment portfolio and participate in projects that were previously only available to institutional investors.

However, the success of real estate crowdfunding investments depends on the credibility and reliability of the crowdfunding platform. Real estate crowdfunding investments are also typically illiquid, meaning that it may be difficult to sell or exit the investment before the project’s completion.

For property developers, the source through which a project is funded will typically determine profitability since some of these sources would usually impose pressures on how and when to sell.

For instance, a developer who finances construction via off-plan subscriptions has indirectly given up the right to price the property upon its completion; hence, losing out on any possible windfall which presents itself as market conditions continue to change.

For experts, the inadequacies replete in many of the more conventional sources of construction finance add credence to the veritable platform provided by the capital market to raise funds for construction purposes, a platform which gives the developer more control over the development project.

The argument is that the capital market is a critical pillar of long-term fund mobilisation needed for capital formation to fast-track economic growth and development.

The capital market is the market for securities, where companies and governments can raise long-term funds.

The main function of the capital market is to channel investments from the investors who have surplus funds to the investors who have deficit funds.

The different types of financial instruments that are traded in the capital markets are equity, debt, hybrid, insurance and derivative.

It consists of the primary market, where new issues are distributed to investors, and the secondary market, where existing securities are traded. Usually, the capital market provides a relatively cheaper source of funds.

Experts also view the short-term funding profile of the money market as unsuitable for project infrastructure investment as against the capital market which creates an enabling environment for the generation of long-term financing and active private sector participation in infrastructure development.

Also, the nature of the capital market is designed to provide a variety of financing instruments and investor categories which could lead to a larger pool of funds than other financing options.

However, despite the advantages of leveraging the capital market for construction finance, there has been minimal activity, especially by the private sector in this regard.

In 2007, the first mortgage-backed security by the Federal Mortgage Bank worth N100bn (about $670m) was issued for residential houses.

Over the years, the trend has seen the government become the major player in the capital market for construction finance. Most of the funds have been raised under the category of infrastructure bonds, with minimal activity from private development companies.

One example is the Lagos-Ibadan Expressway, a major highway that connects the two largest cities in Nigeria. The expressway was partially funded by a N100bn infrastructure bond that was issued in 2013.

The Abuja Light Rail is a light rail system that is also being funded by a N250bn infrastructure bond that was issued in 2018.

According to a former Director-General of the Securities and Exchange Commission, Arunma Oteh, estate developers could issue well-structured bonds for the construction of houses with funds from the sale of the houses directed at meeting debt obligations

She said, “The bond market offers less risky investment and regular returns which guarantee investor patronage.

“Constant creation of new products that would widen investment horizon, give investors value-based investment options and provide the needed cheaper long-term funding to the real estate sector has been of concern to the Commission.”

Several stakeholder meetings had been held in that regard and the issue had been a “front burner” at various fora.

In the last few years, Global Depository Receipts, infrastructural bonds, Exchange Traded Funds, Asset Backed Securities, Mortgage Backed Securities and Real Estate Investment Trusts have been created and some have been used by both governments and corporate bodies.

Through Mortgage Backed Securities, banks and some financial institutions create mortgages in the course of lending activities for house purchases. The borrowers are obliged to make payments in instalments over the life of the mortgage to liquidate the loan.

The lending institution may decide to move the mortgage off its portfolio by selling it to another entity, usually a Special Purpose Vehicle, which then structures the loans into traded securities which are sold to the public or placed privately using the capital market.

Also, Real Estate Investment Trusts, a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages, could be used for developing real estate such as residential houses, shopping complexes, hotels and other commercial properties.

Most REITs have a straightforward business model. The REIT leases space and collects rents on the properties, then distributes that income as dividends to shareholders. Mortgage REITs don’t own real estate, but they finance real estate, instead. These REITs earn income from the interest on their investments.


The first REIT in Nigeria (Skye Shelter Fund) was introduced in 2007, with a capitalisation of about $6.5m. It was officially listed on the Nigerian Stock Exchange on February 28, 2008. The second REIT was introduced in 2008, with a market capitalisation of about $40.8m.

However, REIT, which first surfaced in the Nigerian real estate ecosystem 15 years ago, has struggled to yield the magnitude of impact recorded in other advanced economies.

One of the firms that have leveraged the platform of the capital market for construction finance recently is Wemabod, which recently completed the signing of its ‘Wemabod Financing SPV Limited N50bn Bond Issuance Programme.’

The Chief Executive Officer of Wemabod, Yemi Ejidiran, said the funds would be used to support the development of Unity House at 37 Marina from a commercial rental to a mixed-use property.

Beyond the redevelopment of Unity House, the funds would also be used for the development of a mixed-development property that will house a mall and other recreational facilities in Ikorodu and other uniquely identified properties at various stages of development in Ikoyi, Lekki Phase I, Ikeja, amongst others.

A special purpose vehicle, Wemabod Financing SPV Limited, was created to raise funds from the market.

Details of the bond were structured by GoldBanc Management Associates (the lead issuing house for the deal), while TOLG would serve as legal adviser to the deal.

While speaking at the Wemabod bond signing ceremony, the Managing Director of GoldBanc Management Associates, Olu Abayomi, emphasised the importance of leveraging the opportunities in the capital market to raise construction finance.

According to him, many real estate firms are unable to operate profitably due to the inability to raise funding without the associated constraints that come with most funding sources.

He said, “I think this is what a lot of real estate investors should be doing because construction finance is always difficult. If you can create your construction finance, then you will be able to get a better premium.”

On his part, the Managing Director of TOLG, Michael Orimobi, stated that most property developers were unable to manage the pricing of their property due to the vagaries involved when raising funds from off-takers.

He said, “One of the problems that most real estate companies have is construction finance. What Wemabod has done is a kind of backward integration, rather than use off-taker money to build; they have raised construction finance from the capital market, built and then sold at a premium without being under pressure to sell. When you can raise construction finance, you can price better, and then your margins are better.”

Culled from PUNCH


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