Performance Analysis of Listed Construction and Real Estate Companies in Nigeria
Abdul-Rasheed, Amidu, Tajudeen, Aluko B., Journal of Real Estate Portfolio Management
The acquisition of shares in investment companies specializing in real estate have become a popular form of indirect property investment. However, the publicly listed real estate and construction companies are only a minute portion of the total commercial real estate market, and the speed of securitization has been very slow in Nigeria. This paper examines the investment performance of listed property and construction companies from 1998 to 2005 with a view to developing their competitive and comparative advantage in attracting investment. The risk-adjustment performance of the companies, assessed through Sharpe ratios, show that both property and construction companies do not perform better than stocks, but, nevertheless, do offer diversification possibilities due to their low correlation with the stock market.
Real estate continues to receive widespread attention from both public and corporate bodies as one of the consistent and favorable investment opportunities. There are a number of reasons for this situation. But the most commonly promoted intuitive arguments for direct real estate investment are that of real estate acts as an inflation hedge, provides diversification benefits, and has the potential for superior returns.
One of an investor's essential aims is to protect their assets against inflation-triggered depreciation in real terms. In doing so, an investor faces the problem of future changes of the general price level (inflation rate) being uncertain from an ex ante point of view. The real return of investments is uncertain, even for those investments whose nominal cash flows are contractually fixed (e.g., zero bonds). Real estate to that effect is traditionally regarded as an investment vehicle with a low inflation risk. Intuitively, this case can be justified by the fact that all nominal returns of a real estate investment, such as rents or selling prices, can be negotiated anew. Hence, the investor has the possibility of adjusting the returns of the investment to increase the general price level, especially in times of drastic inflation.
The increasing need for high and secure returns, driven by the rising global competition through open markets, also affects the investment in real estate. Generally, investment decisions are guided by two attributes: risk and return. The process in theory could be reduced to finding the investment opportunity with the best risk-return ratio. And, as asserted by Ibbotson and Brinson (1987), the stimuli for the option to invest in real estate is basically enormous returns coupled with its income growth and capital appreciation potentials. Also, risks and uncertainties are common attributes of every form of investment and the only way to manage them is by a combination of assets, which would yield maximum returns in a portfolio. Real estate, according to Ratcliffe and Stubbs (1996), serves as means of effectively diversifying risk in a mixed-asset portfolio due to its long-term strategic performance.
Despite all of the above, real estate, as a direct investment, is subject to several difficulties. It has, for instance, been traditionally regarded as a lumpy and illiquid investment. Besides, for an ordinary private investor, a direct acquisition may be problematic due to the large amounts of capital outlay, as well as high transaction costs. An alternative for avoiding these obstacles may be the acquisition of shares in investment companies specializing in real estate investment. Securitized real estate has, therefore, been identified as the logical answer to the demand for an efficient diversified real estate portfolio. It provides the economic advantage of high liquidity, higher fungibility, and an indirect avenue by which small investors could ride on the upward property cycle and reap the economic benefits.
With the resurgence of this financial innovation in real estate investment financing, the global real estate markets have undergone an enormous dynamic change that continues to exhibit momentum. …