The Inflation-Hedging Performance and Risk-Return Characteristics of Residential Property Investments in Gombe, Nigeria

Abstract

Purpose:  This study aims at investigating the inflation-hedging performance of residential property investments in Gombe metropolis Nigeria. Design/Methodology/Approach: Questionnaire survey was conducted to obtain primary data on rental and capital values of residential properties from branch managers of Estate Surveying and Valuation Firms in the study area, this was subsequently translated to 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 2003 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 obtained for the study were subjected to Phillip-Perron unit root test as well as the Odinary Least Square Regression analysis. Findings: The study revealed that the inflation-hedging performance of residential property investments in Gombe metropolis vis-à-vis the actual inflation provides a partial hedge (with beta 0.061), vis-à-vis the expected inflation provides a complete hedge (with beta 0.678) and vis-à-vis the unexpected inflation provides a perverse hedge (with beta -0.454). Practical Implications: Inflation-hedging performance 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. Originality/Value: Research work on the subject of inflation-hedging capabilities in Nigeria majorly focused on commercial real estate and stocks in the Southwestern region of Nigeria. This study expanded the scope of the inflation-hedging literature by empirically investigating the inflation hedging performance of residential real estate investments in Northern Nigeria (Gombe metropolis).