Potential for the establishment of Real Estate Investment Trusts by Pension Funds in Zimbabwe
Pension funds are investment pools that provide their members with retirement income. Due to this, depending on their member pool, pension Funds tend to have substantial financial demands. To meet these demands, funds make investments in-order to realise a certain level of return over a long-period of time. This investment return is used to give pensioners enough money, upon retirement, which will guarantee, a fixed annual income until death. To achieve their long-term income goals and thus achieve adequate delivery to pensioners, pension funds function as investment pools which aim to invest in low risk, growth generating assets.
In Africa the three most prevalent asset fund classes are: private equity, infrastructure and real estate. According to the Financial Times, over the years, many institutional investors have moved away from their traditional holdings of stocks and bonds, to real assets such as infrastructure, property and natural resources. Large funds with the most resources, tend to invest, acquire, develop or manage office buildings and industrial parks. Investors who invest in Real Estate will be able to accrue their investment through the negotiation of rent increases, negotiation of long terms leases and extensions to existing leases. This will equate to a regular income stream. However, the illiquid nature of most Real Estate assets poses a challenge for pension funds to carry out their daily liquidity requirements. This issue can be eliminated using Real Estate Investment Trusts (“REITs”) or Funds, as a vehicle of investment.
REITs have been defined by the Centre for Affordable Housing Finance in Africa as “companies or trusts that own and often manage a portfolio of mortgages and / or real estate properties and operate in accordance with certain rules and regulations.” The REIT will issue shares or units which will allow investors to invest in mortgages or properties through their purchase. The shareholder of a REIT will earn a share of the income stream produced by the investment. The share price will be determined by demand and supply as per market forces. This will involve associated market risk and other risk factors specific to immovable property. REITs allow investors to accrue the benefits of owning property as an asset without directly owning the property and managing it. REITs will provide for easily accessible liquid finance through the selling of shares, rather than the selling of property itself. The return of capital will always be guaranteed due to Real Estate’s nature of appreciating in value. REITs, if traded on the stock exchange as shares, as done in South Africa, will eliminate liquidity problems and ease exit opportunities. Listing will also offer greater valuation transparency and certainty for investors, whilst providing fund managers with evidence of which types of properties are most attractive to investors. Potential Zimbabwean REIT structures have however faced challenges regarding prohibitive tax implications relating to transfer pricing and income tax.
Pension Funds in Zimbabwe are regulated and licensed by the Insurance and Pensions Commission (IPEC). The Financial Gazette has reported that the Insurance and Pensions Commission (IPEC) has recently called for the formation of REITs in Zimbabwe. This request has been due to the large portfolio of property investments in Zimbabwe, held by the insurance and pension sector which holds over $1 billion worth of assets invested in properties. Real Estate is currently the number one asset class in Zimbabwe for Pension Funds. This shows that Zimbabwean investors, have identified Real Estate as a provider for good long-term investment.
Despite Real Estate being the number one asset class in Zimbabwe, from an African perspective, IPE Real Assets Publications, has recently reported that over the past five years, Africa-focused Real Estate Funds have raised just US$2bn (€1.6bn) from investors, compared to the US$11.9bn and US$4.2bn in the same period by private equity and infrastructure funds, respectively. REITs in South Africa, according to the Publication, have been particularly successful, where the market is valued at about US$16.1bn. This has prompted other countries, including Kenya, Morocco and Rwanda, to introduce REITs. Ideal properties for Zimbabwean REITs include Joina City, Westgate Complex and High Glen Shopping Complex.
As Zimbabwe’s property market continues to develop, an introduction of Real Estate Investment Trusts, with an elimination of prohibitive tax implications, will assist in the ease and speed of project turnaround; an increase in liquidity and investment returns and, the increasing of investment opportunities for investors, including pension Funds, whilst broadening the countries property sector and enabling an increase in economic activity.