Property Devt and Purple-Sukuk, A Match Made in Heaven

Since it landed in Nigeria with its maiden issue of N10 billion by the Osun State Government in 2013, Sukuk Bonds have found its niche in the Nigerian finance system as a strong means of financing infrastructure. Recently, Purple Group, an active player in the nation’s Real Estate sector, announced that it is issuing a bond to fund its property development in the Lagos metropolis. From the look of it, the relationship will lead to the completion of ongoing construction and the creation of its Purple Urban residences in the Lekki area of Lagos State. Chris Paul reports

When Sukuk Bonds first made its landing in secular Nigeria, it caused fierce religious controversy; with many Nigerians, especially, in the South believing it is another ploy by the North to Islamise the finance sector of the country. But when some states in the South began taking the Islamic Finance certificate, it looked like the Sukuk pudding may just be good for the eating. Osun State led the way to the Sukuk kitchen and then a South Eastern State also had a bite of the pie. They saw it was good and ever since the Sukuk story has been sweet.

Its latest bond issue raise by the Purple Group has further deepened the roots of the Sukuk flower in the enhancement and beautification of the Nigerian property development space.

Similar to a bond in Western finance, Sukuk is an Islamic financial certificate that complies with Islamic religious law commonly known as Sharia. Since the traditional Western interest-paying bond structure is not permissible, the issuer of a sukuk essentially sells an investor group a certificate, and then uses the proceeds to purchase an asset that the investor group has direct partial ownership interest in. The issuer must also make a contractual promise to buy back the bond at a future date at par value.

It is a sharia-compliant bond-like instruments used in Islamic finance and it involves a direct asset ownership interest, while bonds are indirect interest-bearing debt obligations.

Although, both sukuk and bonds provide investors with payment streams, income derived from a sukuk cannot be speculative; because that would make it no longer halal.

Sukuk have become extremely popular since 2000 with the rise of Islamic finance, when the first such products were issued in Malaysia; followed by Bahrain in 2001.

In today’s world, the Islamic Finance instrument is used by Islamic corporations and state-run organizations alike around the globe, taking up an increasing share of the global fixed-income market.

Islamic law prohibits what’s known as “riba,” or what we understand as “interest” in the West.

Traditional Western debt instruments, therefore, cannot be used as viable investment vehicles or ways to raise capital for a business. To circumvent this, sukuk were created in order to link the returns and cash flows of debt financing to a specific asset being purchased, effectively distributing the benefits of that asset. This allows investors to work around the prohibition outlined under Sharia and still receive the benefits of debt financing.

However, because of the way that sukuk are structured, financing can only be raised for identifiable assets.

Representing aggregate and undivided shares of ownership in a tangible asset which relates to a specific project or a specific investment activity, an investor in the Bond, thus, does not own a debt obligation owed by the bond issuer; rather, he or she owns a piece of the asset that is linked to the investment.

In other words, unlike bond holders, sukuk holders receive a portion of the earnings generated by the associated asset.

Are there similarities or differences between Sukuk and conventional bonds?

In terms of similarities, both provide investors with payment streams. They are issued to investors and both may be used to raise capital for a firm.

Considered to be safer investments than equities, both also have their differences; while Sukuk investors receive profit generated by the underlying asset on a periodic basis, bond investors receive periodic interest payments.
While Sukuk involves asset ownership, bonds are debt obligations.

Whereas bond yield is strictly due to its interest rate, the more the asset backing a sukuk appreciates, the more the sukuk appreciates.

Assets that back sukuk are halal whereas bonds are often ribaand may finance non sharia compliant businesses or fuel speculation.

While a bond’s price is largely determined by its credit rating, Sukuk valuation is based on the value of the assets backing them.

Trust Certificates is the most common type of a sukuk and it is also governed by Western law; however, the structure of this type of sukuk is more nuanced. The organization raising funds first creates a special purpose vehicle (SPV).

The SPV then issues trust certificates to qualified investors and puts the proceeds of the investments toward a funding agreement with the issuing organization. In return, the investors earn a portion of the profits linked to the asset.

These are the principles governing the Sukuk-Purple bond; as it were, concerning redefining the dynamics of property development in Nigeria.

But then, this is no Sukuk master class. This piece is on how a fast-,growing property development firm got the attention of the Islamic Finance instrument, the advancement of the goal to bridge the property deficiency gap in Lagos state and bring innovative residential concept to property development in Nigeria.

Incorporated as a limited liability company in 2015 Purple Real Estate Development Company (PREDCo)
commenced operations on September 2015; and it is a wholly-owned subsidiary of Purple Real Estate Income Limited. The principal activities of PREDCO include the development of residential and commercial real estate with the aim of outright sales or lease of properties to meet the needs of individuals and corporate bodies.

Leveraging on its market knowledge and expertise as well as its network to attract, invest and deliver sound positive alpha returns to its investors, PREDCO focuses on development/growth opportunities and has equitable board/project involvement. It has consistently raised funds from HNI’s and Institutions.

With regards to real estate, Purple is looking to build on the success of its flagship mixed-use project, the Maryland Mall and other residential projects and aims to grow its real estate footprint by delivering 3- 5 similar assets within the next five years and up to 1000 residential units.

Some of its major existing projects include BishopsGateresidences and Redworth Terraces at Ikate Elegushi at Lekki; and Purple Maryland, its work, shop, eat, play and drink retail Mall experiment.

It has secured locations for delivery under a staggered approach for: Lekki Phase 1 – 185 units of 3-bedroom, 4-bedroom and 5-bedroom apartments ▪ Maryland (Purple Macro) – 130 units of 1-bedroom, 2-bedroom and 3-bedroom.
While other retail and mixed use centres are all under Pre-development phase, construction has commenced on Purple Lekki.

Between 2018 and 2019, PREDCO had concluded the sale of its first two projects – Bishopsgate Residences and RedworthTerraces and also the development manager for the Group’s flagship project Purple Maryland and Purple Lekki, PREDCO derives both management and agency fees from its activities.

Nigeria’s real estate and construction sector is one of the key sectors of the economy as the 6th largest contributor to GDP and accounting for c. 9.8% of GDP in 2019.

The recent growth in the construction sector has largely been driven by the increase in foreign direct investments and local private capital in the economy as well as increased infrastructural development, particularly in Lagos State.

The sector witnessed a slowdown in growth in 2016, as it was one of the most negatively impacted sectors during the nationwide recession
With improving macroeconomic fundamentals, the real estate sector is expected to return to pre-recession growth levels.

Following the establishment of the Nigerian Mortgage Refinance Company (NMRC) with the purpose of promoting home ownership while deepening the primary and secondary mortgage markets, credit to the real estate sector is expected to increase.

In addition, the Central Bank of Nigeria (CBN) new policy direction instructing commercial banks to increase lending at lower rates to stimulate aggressive growth of the economy is one of the major government economic and social policies that is expected to attract investment into the real estate development sector.

In Lagos and Abuja, which are prime locations and key cities in Nigeria’s real estate market, there is a high demand for commercial buildings and residential apartments.

This is the turf the Purple group has continued to dominate in its stride with its mix-use architectural masterpieces. With this sukuk energy, PREDCO is about to soar beyond the height of the eagle in the sky and may soon become the prime property development driver of the Nigerian State with its lofty goal of adding 1000 keys to the residential real estate market in Lagos State.

No doubt, this Islamic Finance instrument will further fire the zest of the Purple group to continue to capture the minds and temperament of today’s new tenants and landlords.