Diversification Opportunities in African Real Estate Markets

This paper seeks to establish whether equity markets and real estate markets are integrated or segmented in Kenya and South Africa. Two markets are integrated when an efficient portfolio constructed by investors using assets on both markets earns the same risk-adjusted return since systematic risk, common on both markets, is the only risk priced. On the other hand, segmentation will exist when a real estate market prices systematic risk relative to real estate market only such that risk-adjusted return on the market portfolio will be significantly different from risk-adjusted return on real estate market portfolio. When segmentation is established, investors can hold assets on both markets at the same time but when integration exists, the assets can only be held as substitutes. Therefore, this study will answer two important questions: 1) are real estate markets and equity markets in selected countries integrated or segmented, 2) what systematic risks are priced in all markets. Quarterly property indices and stock market indices from 2004:Q4 to 2012:Q1 will be collected from HassConsult and Nairobi Stock Exchange for Kenya respectively and from Absa and Johannesburg Stock Exchange for South Africa. Data collected will be subjected to unit root tests to find out whether time series data sets are stationary, linear and non-linear cointegration tests to look for integration between the markets, causality tests and generalized least square estimation to test for common significant explanatory variables. Conclusions drawn from this study will be of essence to rational investors on both markets who want to diversify their portfolios by including assets of both markets. The conclusions will be guided closely by the research questions that will be tested. Recommendations will also be drawn based on the conclusions.