INFLUENCE OF INFLATION ON COMMERCIAL REAL ESTATE RETURNS IN NIGERIA

Purpose: This research paper examines the influence of inflation hedging status on commercial property holding returns of property market in Akure, Ondo state. The study analyses the holding period returns generated from commercial property in the selected areas in Akure.

Design/methodology/approach: The selected study area comprises of commercial property type developments in Oba Adesida, Ijoka, Oke-Aro, Alagbaka, and Arakale. The data used for this research paper is the total return derived from the income and capital return sourced from the property and valuation companies. Treasury bill rates provided by the Nigeria central bank served as a proxy for actual inflation, while data on consumer price index from the bureau of statistics served as a proxy for anticipated inflation. The gap between actual and anticipated inflation was used to compute the unexpected inflation. The returns of the commercial properties were examined using descriptive analysis, and the Philip-Perron unit root test was employed to determine whether the data was stationary. Regressing the returns versus actual, anticipated, and unexpected inflation rates was done using ordinary least square model that Fama and Schwert postulated.

Findings: The ability of commercial real estate to hedge against inflation varies depending on the location. It was discovered that the income returns of commercial properties in all the locations considered entirely hedged against anticipated inflation and unexpectedly hedged against actual and unforeseen inflation (Income return variable is a short-term component). The capital and total return are not been hedged against any of the inflation components (Capital and total return is a long-term component).

Implication: The findings of this study implies that commercial real estate returns is a hedge against inflation in the short-term but not a good hedge against inflation in the long-term. Domestic and foreign investors (individual and institutional) interested in investing in Nigeria's real estate market will find this study beneficial. It can assist investment forecasts as well as decisions about which asset types to include in portfolios to protect the value of investors' earnings from inflationary erosion. Also, academics and researchers studying the Nigerian real estate market will have useful and up-to-date references.

Originality/value: This paper examines the influence of inflation hedging status on selected commercial property holding returns in Akure by extending the time frame to 2020 and also considers the existing variation amongst the selected areas. Furthermore, this study will help prospective investors and real estate practitioners that are interested in commercial property investment in Nigeria to understand the influence of inflation on commercial real estate holding returns.