Inflation-Hedging Capabilities of Commercial Real Estate Investments in Metropolitan Lagos

Abstract

There is a growing concern by investors seeking to understand how inflation interferes with their returns on real estate investments.  However, there have been contrasting findings from studies carried out in various study areas of Nigeria about the inflation hedging capabilities of real estate investments.  An attempt was made in this study to assess the hedging abilities of commercial real estate investments (shops and offices) in the commercial nerve centres of Lagos, and five prime commercial locations in Lagos metropolis were considered.  The study made use of data on the total returns on commercial real estate investments derived from the average annual capital and rental values of the investments.  The consumer price index was adopted as a proxy to actual inflation; while Treasury bill rates were adopted as a proxy to expected inflation.  The period of data coverage was from 2007 to 2018.  Regression analysis by Fama and Schwert (1977) was used to ascertain the inflation hedging abilities of the investments.  The statistical software used was SPSS, version 22.  The study discovered that the total returns from the commercial real estate investments in the study area did not provide a hedge against actual, expected and unexpected inflation.  Thus, the study recommends that investors and real estate practitioners exercise caution when considering the real estate investments in the study areas.