Academic journal article Journal of Real Estate Literature

Geographic Diversification Issues in Real Estate Markets in Africa

Academic journal article Journal of Real Estate Literature

Geographic Diversification Issues in Real Estate Markets in Africa

Article excerpt

Real estate portfolio diversification is described as the means by which investors minimize their exposure to firm-specific risk and systematic risk, as well as moderating the short-term effects of individual asset class performance on portfolio value. Research into real estate portfolio diversification began with the aim of analyzing how illiquidity and immobility issues that were intrinsic in real estate could be overcome (Muller, 2013).

Traditionally, property companies looked at diversifying their real estate portfolio diversification by optimizing the returns of property companies generally either geographically or through property type diversification. This is achieved by spreading the risk of a property portfolio either amongst different locations, both locally and internationally, or different property sectors, namely industrial, retail, office or residential. As property markets are driven by local factors, property portfolio diversification into foreign property markets will ensure that it will yield great returns as the markets would not be positively correlated (Eichholtz, Koedijk, and Schweitzer, 2001). Property markets provide lesser degrees of international correlation than other asset class markets, namely bond and stock markets (Eichholtz, Koedijk, and Schweitzer, 2001).

Diversification of property portfolios into emerging markets like those found in Africa has not been explored to any great depth. Recorded historical performance of emerging markets has resulted in the gross generalization that these markets, overall, are volatile and that they offer diversification prospects for global investors. With regard to real estate investment performance, there is little evidence as to whether these investments in emerging markets offer significant diversification prospects for international investors (Barry and Rodriguez, 2004).

The role of emerging markets in real estate portfolio diversification has begun to take precedent and is becoming relevant today. For instance, the real estate investment trust (REIT) market has been introduced in countries in Asia such as Japan, South Korea, Taiwan, Singapore, Hong Kong, Malaysia, and Thailand (Ooi, Newell, and Sing, 2006). Researchers such as Garvey, Santry, and Stevenson (2001) and Bond, Mardi, and Fry (2003) have examined the Asian real estate markets and found that they offer long-term diversification for international real estate securities firms that have invested in real estate companies in Asian countries (Ooi, Newell, and Sing, 2006). Emerging markets in Africa such as South Africa, Nigeria, and Ghana have also introduced REITs, while countries such as Kenya have introduced REIT regulations; this is expected to increase the REIT market in the African continent. The growth of REITs in Africa would help increase the investments in African real estate. According to Mwanza (2013), real estate in Africa represents 1% of the global asset value of REITs.

The South African listed property sector has been the best performing sector in comparison to other asset classes. In 2012, the sector delivered a total return of 36%, outperforming cash, bonds, and equities to be South Africa's top performing asset class for four years in a row (Swart and Kettles, 2013). The sector has grown immensely over the past five years despite the 2008 recession. The market capitalization in 2007 was just R92 billion, as noted by Buchner (2008), but as at January 2013, the market capitalization of the sector was just above R210 billion, which shows the exceptional performance of the sector (Muller, 2013). The market capitalization of the South African listed property market is currently valued at over R400 billion (U.S. $35 billion) (Moneyweb, 2014). Listed property companies include property firms that have been listed on the Johannesburg stock exchange since 1983, such as the Fountain Trust, valued at R9.44 billion (U.S. $816 million) and recently listed property companies such as the Accelerate Property fund with 52 well-established properties valued at R6. …

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