The Inflation-Hedging Properties Of Reits In Emerging Markets: The Evidence From Turkey

This study empirically tests the inflation-hedging abilities of Turkish REITs in comparison with Istanbul Stock Exchange (ISE) stocks over the period 1999:12 to 2004:12. The study is motivated by two factors. First, compared to REITs in developed capital markets, Turkish REITs have some important tax incentives as well as flexibility in managing their portfolios. Second, the Turkish market provides a good opportunity to test the hedging behaviour of real estate stocks under a high inflationary economy. To the best of my knowledge, the current study is the first attempt to evaluate and provide empirical evidence on the inflation hedging properties of Turkish REITs. The hypothesis that the real estate investment hedges against both expected and unexpected inflation is tested by using the methodology of Fama and Schwert (1977) and also the Fisherian Direct Causality model. Expected inflation is measured by two proxies. The lagged returns on 3-month T-bills are taken as the first measure of the expected inflation rate. The second proxy is the one offered by Fama and Gibbons (1982). The expected inflation rate is estimated using the yield on 3-month T-bills. The empirical findings are consistent with the existing studies in the literature, which indicate that REITs possess some hedging ability against inflation. The results show that Turkish REITs, in general, provide a better hedge against both actual and expected inflation than does ISE stock. In particular, the REITs, which mainly invest in residential and office property and projects, offer hedging abilities against inflationary expectations (both expected inflation level and changes in expected inflation). In contrast, ISE stocks act as a perverse hedge against the changes in expectations of inflation. The results also illustrate that neither REITs nor ISE stocks are able to hedge against the unanticipated inflation in a high inflationary environment in Turkey.