October 28, 2014

Mainland Residential Property Outperformed the Island over a 5 year horizon

Dolapo Omidire

An optimal mixed asset portfolio is not just a product of the assets included, but also a product of the relationships among the assets, their respective allocations and diversification qualities. As a result the inclusion of real estate in a mixed asset portfolio has been strongly supported for its diversification ability, which is a result of its low correlation with other asset classes.

RAC Nigeria recently released a study that evaluated the performance of assets in the typical Nigerian Investment Portfolio over a 1 year, 3 year and 5 year investment horizon. The analysis shows that over a 1 and 3 year investment horizon the Island Residential Property outperforms that of the Mainland. However, over a 5 year horizon Lagos Mainland property outperformed the Island. The author of the report explains that during the stock market crash over 5 years ago, the property on the Mainland was more resilient to fall in capital values than properties on the Island. Consequently, that resilience meant the 5 year return for Mainland property ‘withstood the storm’ better than that of the Island.

Source: Residential Auctions Company and FDHL Analytics
Source: Residential Auctions Company and FDHL Analytics

As the graph above shows, the assets included in the analysis were:

  • Equities – represented by the Nigerian Stock Market All Share Index
  • Federal Government Bonds
  • Mainland Residential Property (Lagos)
  • Island Residential Property (Lagos)

The report noted that there was a correlation between the equity market and the Island residential market. It can be suggested that this relationship is because the Island is home to more investible real estate. Hence, during the asset allocation process in a typical mixed asset portfolio, equities and real estate may receive corresponding investment inflows and outflows.

Finally, the perception of real estate as a portfolio diversifier is changing. Recent academic studies have argued that the correlations between real estate and other asset classes rise during periods of economic downturn. The implication is that diversification benefits of direct real estate diminish when they are required the most, weakening the argument supporting its inclusion as an integral component of a mixed asset portfolio.

Download the Report. Asset-Class-Performance-In-The-Nigerian-Investment-Portfolio.pdf

RAC utilised non transactional data (asking rentals & sales values) to represent the returns for mainland and island residential property. Though transactional/achieved rentals and sales values provide a more accurate representation of the market, the opaque nature of the Nigerian real estate market means that such information is difficult to access. 

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