The effects of adding real estate into mixed‐asset portfolios in South Africa

Abstract

Purpose -The purpose of this paper is to examine the performance of asset classes in the South African investment market and assess the diversification benefits from adding listed property stock into domestic mixed-asset portfolios. Design/methodology/approach -The data sets comprise of quarterly returns on property listed stock, all share, all bond and 90 day Treasury bill for the period of January, 1999 to December, 2009. Return-risk performance of all the assets were compared using mean return, standard deviation, mean standard deviation ratio, coefficient of variation and correlation coefficient. To determine return enhancement and risk reduction benefits of property listed stock in mixed-asset portfolios, 22 naïve portfolios (17 with property stock and five without) were constructed and, their return and risk levels, obtained using Markowitz's mean variance analysis, were compared. Findings -The results showed that there was evidence of superior return and risk-adjusted performance of real estate stock over other assets. Also, adding property stock into mixed-asset portfolios was found to have produced enhanced and statistically significant risk-adjusted returns but minimal and insignificant risk reduction benefits. These results however are conditional on the percentage allocation to real estate and the asset class replaced.Research limitations/implications -The study has implication for investors. They could consider the inclusion of listed property stock in their portfolios with the expectation of a significant risk-adjusted return enhancement but marginal risk reduction. Originality/value -The paper is one of the few attempts at assessing the diversification benefits of listed property stock, especially from the perspective of African emerging market.

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

“…Shrewd investors often seek to invest in assets that have reliable degree of certainty in protecting the purchasing power of investors' funds, as well as the provision of a continuous stream of positive rate of returns with minimal risk (Dabara, 2015). This can be achieved when investors make informed decisions with regards to the diversification potentials as well as the inflation-hedging potentials of the asset class in question (Olaleye, 2011;Ogunba, Abiyomi & Dugeri, 2013). Koen & Monique (2010) posited that an investment can be defined as 'expenditure in cash or its equivalent during one or more time periods in anticipation of enjoying a net inflow of cash or its equivalent in some future time period or periods'.…”

Impact of Adding Securitised Property Into Mixed-Asset Portfolio in Emerging Markets: Evidence From Nigeria

“…From an emerging market outlook, authors such as Tan and Ting (2008), Lee and Ting (2009), Nguyen (2010), Olaleye (2011) and Pham (2012) have examined the effects of real estate in a mixed-asset portfolio. Ramushu (2006) analysed the performance of South African real estate assets in a domestic portfolio containing equities, bonds and real estate.…”

“…However, across the efficient frontiers, property assets might not enhance optimal portfolio combination. Also, Olaleye (2011) analyzed the diversification benefits from adding real estate shares into domestic mixed-asset portfolios in South Africa. Quarterly returns on property shares, all shares, bonds and 90-day treasury bills over the period of 1999 -2009 were analyzed on a risk adjusted basis.…”

“…Evidently most of the prior studies have based their analyses on developed property market such as the UK, USA, New Zealand, Australia, with a focus on REITs as a form of indirect real estate. There are very few studies on Africa's emerging markets and in effect on securitised property (SP) which are the predominant form of indirect real estate in Africa emerging market (Olaleye, 2011;Mwanza, 2013). The few available studies include that of Ramushu (2006) and Olaleye (2011) on South African market.…”

“…There are very few studies on Africa's emerging markets and in effect on securitised property (SP) which are the predominant form of indirect real estate in Africa emerging market (Olaleye, 2011;Mwanza, 2013). The few available studies include that of Ramushu (2006) and Olaleye (2011) on South African market. In essence, where REITs vehicles rarely exist in most African emerging property markets, investors can only tap into the indirect property investment markets through property company share or securitised property (SP).…”