The Diversification and Inflation-Hedging Potentials of Direct and Indirect Real Estate Investments in Nigeria

Abstract

This study aims at examining the diversification and inflation-hedging potentials of both direct and indirect real estate investments in Nigeria from 2005 to 2014 this is with a view to providing information for investment decisions. DESIGN/METHODOLOGY/APPROACH: Secondary data on rental/capital values of direct real estate investments covering an average total of 1,587 residential properties was obtained from the records of 5 Estate Surveying and Valuation Firms in Gombe. Similarly, the dividend and share prices of the indirect real estate investment were also collected from the data bank of the Nigerian stock exchange. These data were subsequently translated to holding period returns. Furthermore, secondary data with respect to the Nigerian Consumer Price Index (CPI) which was used as a proxy for actual inflation for the study was collected from the National Bureau of Statistics (NBS). These data groups were used to calculate the asset and portfolio returns as well as the asset and portfolio risks of the selected assets. Furthermore, both descriptive and inferential statistics were used to determine the diversification and inflation-hedging potentials of the selected investment assets. This involved the use of weighted means, Pearson Product Moment Correlation and the Ordinary Least Square Regression. FINDINGS: The study revealed that investment in direct property provided the highest returns (22.48%) as well as the highest level of risk (8.71548%) over the study period. The study further showed that only the direct property investment demonstrated the existence of diversification potential. Similarly, among the two selected asset classes only direct property showed complete inflation-hedging potential with beta 0.082, while indirect property showed a beta of-0.126, suggesting a perverse hedging characteristics. PRACTICAL IMPLICATIONS: Diversification and Inflation-hedging potentials of investment asset classes is of particular interest to investors. The results of this study can be useful for investment forecasts as well as investment decisions on asset types to include in portfolios as a measure for protecting investors' earnings from erosion by inflation and a means of enjoying diversification benefits thereby improving the performance of the investment portfolio. ORIGINALITY/VALUE: Research work on the subject of diversification and inflation-hedging in Nigeria were majorly conducted in isolation. This study expanded the scope of the diversification and inflation-hedging literature by empirically investigating both investment indicators in a comparative context.

Do REITs Hedge against Inflation? Evidence from an African Emerging Market

“…It shows that there may be other factors influencing the changes in the N-REIT returns rather than inflation. (Dabara et al, 2015) and (Dabara et al, 2018) suggested that financial structure, market structure and other investment parameters can significantly impact indirect investment assets classes.…”

“…According to Loo et al (2016 p. 231), such reasons could include differences in "asset management structure, geographical restriction of underlying assets, real estate development allowance, gearing restriction as well as dividend pay-out requirement". Furthermore, it was observed that the peculiarities associated with the structure, conduct and performance of individual REIT markets could also explain why findings from one REIT market might not reflect the others (Dabara et al, 2015;Dabara and Ogunba, 2019). These assertions are particularly true for REIT markets of emerging economies, such as the Nigerian REIT (N-REIT) market in Africa.…”

Structure, Conduct and Performance of REITs in Emerging Markets

“…This scenario is quite contrary to what was found in literature on the performance of REITs in other parts of the world (Jackson, 2008;Manoj, 2016). The problem is exacerbated and becomes more perplexing by the fact that the property assets in Nigeria (from which REITs derive their income) are performing well in terms of returns on investment (Dabara, Ogunba & Araloyin, 2015;Dabara & Oyewole, 2015). This is also a true reflection of the performance of real estate in other African countries.…”

Impact of Inflation on Indirect Real Estate Investments in Nigeria

“…The debate on inflation and investment returns pioneered by Fama and Schwert (1977) have produced an extensive literature (most of which is based on investment performance of asset classes in developed economies, creating a gap for studies from developing economies). Studies that made up such literature includes investigations of the inflation hedging characteristics of asset classes such as: investments in real estate, REITs (Real Estate Investment Trusts), gold, stocks, commodities, bonds, antiques, equities, and shares among others (Dabara, Ogunba and Araloyin, 2015). The results of these studies have shown a varying pattern, indicating that there is no consensus on the hedging characteristics of various asset classes in different parts of the world.…”