The Diversification And Inflation-Hedging Potentials Of Direct And Indirect Real Estate Investments In Nigeria

PURPOSE: 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.