A comparative study on the Inflation-hedging properties of REITs and Common Stocks in South Africa
Date
2023-06
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
University of the Witwatersrand, Johannesburg
Abstract
The aim of this paper is to examine the ability of South African REITs and common stock to hedge against inflation in the short run from 2014 to 2022. Given the volatile economic environment that South Africa operates in, this poses a risk to the financial market. One of the major risks relates to inflation as it erodes real returns on investments, and this drives the need of gaining clarity on the inflation-hedging characteristics of assets in the stock market. Studies evaluating the inflation-hedging abilities of real estate and common stock present mixed results and the literature on this comparison is vast but largely excludes African countries. Moreover, the introduction of the REIT regime in South Africa in 2013 has created a new opportunity for real estate investment, which may have different implications for inflation hedging than traditional real estate. This paper adopts the Fama and Schwert approach, which is based on the Fisher model, to analyse the relationship between inflation and asset returns. The paper considers both actual inflation, measured by CPI, and expected and unexpected inflation, estimated by an ARIMA model. Using CPI as a proxy for actual inflation, a negative relationship is found between equities and inflation, and a positive relationship between REITs and inflation. These relationships were consistent for both the actual and the unexpected components of inflation. However, both asset classes exhibited a negative relationship with expected inflation. None of these regression results were statistically significant. Findings imply that neither SA Equities nor REITs can serve as reliable inflation hedges. However, the findings also imply that the relationship between inflation and the returns of these assets is nuanced and may depend on the nature of inflation (actual, expected, or unexpected). The findings will assist investors in making investment decisions, especially on protecting their wealth from excessive inflation.
Description
A research report submitted in partial fulfilment of the requirements for the degree of Master of Management in Finance and Investments at the University of the Witwatersrand, Johannesburg, Wits Business School, in 2023.
Keywords
South African REITs, South Africa, Real Estate Investment, ARIMA model, South African Equities, UCTD, Common stocks
Citation
Maratela, Tsholofelo Keletso. (2023). A comparative study on the Inflation-hedging properties of REITs and Common Stocks in South Africa. [Master's dissertation, University of the Witwatersrand, Johannesburg]. WIReDSpace.
https://hdl.handle.net/10539/38905