Inflation Correlation with Commercial Real Estate’ Investment Returns in Akure, Nigeria

Abstract

This study aims at investigating the relationship between inflation and commercial real estate’ investment returns with a view to determining the inflation-hedging characteristics of commercial property investments in Akure metropolis, Nigeria. Questionnaire survey was conducted to obtain primary data on rental and capital values of commercial properties from branch managers of Estate Surveying and Valuation Firms in the study area. This was subsequently translated to the income, capital and total returns. Similarly, secondary data with respect to the Nigerian Consumer Price Index (CPI) which was used as a proxy for actual inflation and the 90-day Treasury bill rates (used as proxy for unexpected inflation) for the period between 2002 and 2012 were also collected from the National Bureau of Statistics (NBS) and the Central Bank of Nigeria (CBN), respectively. The unexpected inflation was calculated as the difference between the actual and expected inflation. The 3 groups of data sets obtained for the study were subjected to the Phillip-Perron unit root test as well as the Odinary Least Square Regression analysis. The study revealed that the inflation-hedging characteristics of commercial property investments in Akure metropolis vis-à-vis the actual inflation provides a perverse hedge (with betas -0.464,-0.360 and -0.609 for the income, capital, and total returns, respectively), similarly, vis-à-vis the expected inflation also provides a perverse hedge (with betas -0.595,-0.147 and -0.597 for the income, capital, and total returns, respectively). However, vis-à-vis the unexpected inflation component provides a partial hedge (with betas 0.183, 0.134 and 0.079 for the income, capital, and total returns, respectively). 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 most especially in an emerging property market like Akure, Nigeria.