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Weekly UpdatesABSTRACT. With a focus on the Nigerian property market, this paper considered and empirically analyzed how property market nature and the perception of market players of some qualitative factors have impacted on choice of property portfolio diversification strategies. Questionnaires, backed up with interviews, were administered on 28 institutional property investors and 159 real estate practitioners in three commercial nerve centres of Nigeria, namely, Lagos, Abuja and Port-Harcourt metropolitan areas. The frequency distribution analyses' results revealed that the Nigerian property market was an emerging one and, as it is expected, there was dearth of time series data while investors in the market were small time institutional investors. Using mean rating on a 4-point rating scale, the study found six factors, arising from the nature of the property market, as the significant factors impacting on choice of diversification strategies. These are: the investors' overall expectation of the benefits of diversification scheme, the need to reduce management operating costs, management convenience, operating environment, market players' education and knowledge of alternative diversification techniques and availability or otherwise of data in the market. The result of cross tabulation and Chi-square test also indicated that there was a statistically significant relationship between educational qualifications of practitioners and their choice of diversification strategies.
KEYWORDS: Property portfolio; Diversification strategies; Property market nature; Choice factors; Nigeria
NUOSAVYBES RINKOS PRIGIMTIS IR NUOSAVYBES PORTFELIO DIVERSIFIKACIJOS STRATEGIJOS PASIRINKIMAS: NIGERIJOS PATIRTIS
SANTRAUKA
Daugiausia demesio skiriant Nigerijos nuosavybes rinkai, siame darbe apzvelgta ir empiriskai isanalizuota itaka, kuria, renkantis nuosavybes portfelio diversifikacijos strategijas, daro nuosavybes rinkos prigimtis ir tai, kaip kai kurie rinkos dalyviai suvokia tam tikrus kokybinius veiksnius. Pasitelkus anketas ir pokalbius, apklaustos 28 i nuosavybe investuojancios organizacijos ir 159 nekilnojamojo turto specialistai trijuose pagrindiniuose Nigerijos komerciniuose centruose, t. y. Lagose, Abudzoje ir Port-Harkorte. Dazniu lenteliu analizes rezultatai parode, kad Nigerijos nuosavybes rinka yra kylanti ir, kaip tikimasi, truko laiko eiluciu duomenu, nes rinkoje veikiantys investuotojai buvo smulkus instituciniai investuotojai. Apskaiciavus vertinimu vidurki pagal keturiu balu skale, tyrimo metu nustatyti sesi veiksniai, susije su nuosavybes rinkos prigimtimi, kurie daro reiksminga itaka renkantis diversifikacijos strategijas. Jie yra tokie: bendrieji investuotoju lukesciai del is diversifikacijos schemos gaunamos naudos, poreikis mazinti operatyvines vadybos islaidas, valdymo patogumas, operatyvine aplinka, rinkos veikeju issilavinimas ir zinios apie alternatyvius diversifikacijos metodus bei prieinamos arba kitaip pasiekiamos zinios rinkoje. Be to, kryzminiu lenteliu ir Chi kvadrato kriterijaus rezultatai parode, kad tarp specialistu issilavinimo (kvalifikacijos) ir ju pasirinktu diversifikacijos strategiju yra statistiskai reiksmingas rysys.
1. INTRODUCTION
Arising from the need to address the problems of risk in investment decision, the pattern of investment all over the world has changed substantially and investors are looking for opportunities to diversify their portfolios even on a global scale (Hoesli and MacGregor, 2000 and Lim et al., 2002). The reason for this is not far fetched. Diversification gives investors the benefit of varying investment possibilities in order to minimise the encompassed risks and maximise the return therefrom. The concept describes the combination of investments within the same asset class. Thus, diversification achieves the same objectives as asset allocation: maximising return with minimum risk. However, with diversification, the concern is with reducing the specific or unsystematic risk, while asset allocation focuses on reducing the systematic risk. Meanwhile, property market is localised and products are heterogeneous, real estate market place is an amalgamation of a least hundred, if not thousands, of specific market segments that have their own conditions, problems and opportunities. Thus, diversification as used in this paper is relevant to the concept of minimising the systematic and unsystematic risks within real estate investment market.
Since Markowitz (1952, 1959) foundation works on Modern Portfolio Theory (MPT), an important issue that has occupied the minds of professionals and researchers, especially in the developed world, is how to ensure the selection of best strategy in portfolio diversification. And, in realisation of the fact that investment of any type has two principal components (anticipated risk and return); investors' and researchers' interests on portfolio diversification have focused mainly on analysing the return/risk levels of available alternatives. The choice between these available alternatives, which range from a simple rule of thumb to a full scale quadratic programming techniques, can be grouped into two main approaches. These are (i) naive diversification which is based purely on a subjective estimate of portfolio's benefits and (ii) MPT based quantitative techniques such as mean-variance analysis, constant correlation analysis and single index model.
Generally, investors' and practitioners' choice of portfolio diversification strategies is influenced by the return/risk pay-off of the different strategies/portfolios. In other words, strategy that gives the portfolio with the best return/risk ratio is to be preferred by a rational investor (Hargitay and Yu, 1993; Ajayi, 1998; Hoesli and MacGregor, 2000). This explains why researchers' efforts on property portfolio diversification strategies have focused mainly on examining the benefits due to diversification by analysing, in quantitative term, the return/risk attributes of the strategies/portfolios (see for example Mueller and Laposa, 1995; Brown et al., 2000; Lee, 2005; Olaleye et al., 2006).
Recently however, the quest to explain the choice of property portfolio diversification strategies has tended to focus on qualitative factors arising from the nature of property market aside the issue of return/risk attributes. This is because the study by Barry et al. (1996) and Olaleye (2005) opened the possibility that other factors, arising from the nature of a particular property market, could impact on decision makers' choice of diversification strategies aside the issue of return/risk benefit. In addition, comments of authors such as Del Casino (1995), Keogh and D'Arcy (1994), D'Arcy and Keogh (1998), Hargitay and Yu (1993), Brown (1997), Ajayi (1998), Hoesli and Macgregor (2000) lend credence to the fact that lack of easy access to good time-series data or market index cum lack of extensive information flow and research activities could discourage usage of MPT based diversification. The authors' submissions also suggest that lack of adequate knowledge of quantitative techniques of diversification, arising from the complexity of the methods and the less sophisticated nature of the property market with its associated institutions and networks, might discouraged the use of MPT based diversification strategies. Also, the acceptance or otherwise of the quantitative techniques of diversification might be a major factor limiting choice of MPT based strategies in an emerging real estate market like the Nigerian property market. Lummer et al. (1994) have opined that investors are loath to invest on the basis of trading and allocation system they do not understand. Hargitay and Yu (1993) had earlier noted that the interpretation of quantitative information and its use required the understanding of a number of mathematical and statistical procedures, the complexity of which could be quite daunting for investors. These studies have thus produced theoretical evidence which tends to suggest the presence of other factors capable of limiting/impacting on market players' (investors and practitioners) choice of diversification strategies in a particular property market. In other words, these studies, though lacked in empirical evidence, have set out a body of theory and evidence to suggest that the property market environment, nature and practice and the way the decision makers in the market perceived some qualitative factors would influence choice of diversification strategies apart from return/risk attributes of portfolios/ strategies. Therefore, there is need to provide empirical answer to the question of how property market nature and the perception of market players of some qualitative factors of diversification have impacted on the choice of portfolio diversification strategies.
Except for the study of Barry et al. (1996) that have considered the issue of qualitative factors influencing choice of diversification strategies, other empirical studies in the past have concentrated only on analyzing return/ risk attributes of various diversification strategies. Examples of such studies include Miles and McCue (1982), Hartzell et al. (1986), Hartzell et al. (1987), Grissom et al. (1987), Giliberto and Hopkins (1990), Mueller (1993), Mueller and Laposa (1995), Williams (1996), Wolverton et al. (1998), Cheng and Liang (2000), Viezer (2000) and Brown et al. (2000). Others include Lee (2005), Olaleye et al. (2006) and Adair et al. (2006). The benefits (and disbenefits), in terms of return/risk attributes, of international portfolio diversification have also been examined by Steinert and Crowe (2001), Conover et al. (2002) and Bond et al. (2003). However, apart from the fact that Barry et al. (1996) only identified the qualitative factors potentially limiting investors' diversification opportunities, the study used a data set which may not be useful as proxies for the underlying real estate investment environment in emerging markets like Nigeria. The authors' definition of emerging market (as adopted from the International Finance Corporation (IFC)) as a capital market in a developing nation is only relevant to a developing nation's market where real estate is already incorporated into capital market, as against a non-integrated real estate market as used in this paper. Thus, there is still lack of evidence of the market/ qualitative factors potentially impacting on decision makers' choice of diversification strategies in undeveloped real estate market. This paper addressed this issue with a focus on the Nigerian property market. It is hoped that, with the advent of globalization, the paper will also be a source of useful information for an understanding of the Nigerian property market by international investors. It is also capable of providing ways by which property portfolio managers can improve on their diversification selection decisions.
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