Factors influencing the choice of property portfolio diversification evaluation techniques in Nigeria
| Pages | 23-42 |
| Date | 13 February 2007 |
| Published date | 13 February 2007 |
| DOI | https://doi.org/10.1108/14635780710720153 |
| Author | A. Olaleye,B.T. Aluko,C.A. Ajayi |
| Subject Matter | Property management & built environment |
Factors influencing the choice of
property portfolio diversification
evaluation techniques in Nigeria
A. Olaleye, B.T. Aluko and C.A. Ajayi
The Department of Estate Management, Obafemi Awolowo University,
Ile-Ife, Nigeria
Abstract
Purpose – The purpose of this paper is to examine the factors that have influenced the use of implicit
(naı
¨ve) techniques in property portfolio diversification evaluation in the Nigeria property market. This
is necessitated by the need to look at the ways by which the property portfolio diversification
evaluation practice in the market could be made to improve and adjust to ever changing global trends
in this area.
Design/methodology/approach – The authors of this paper administered questionnaires, backed
up with interviews, on 28 institutional property investors and 128 real estate practitioners in three
locations (commercial nerve centres) of the country, namely, Lagos, Abuja and Port-Harcourt
metropolitan areas. Data were analysed with the use of frequency distribution, mean and standard
deviation measures, relative importance index and Pearson Chi-Square test.
Findings – The results of the study in this paper revealed, among others, that lack of time series data
and the small size of many of the investors’ portfolios in Nigeria encouraged the use of implicit
analysis in their property portfolio evaluation techniques. The study also showed that investors and
practitioners detest complex calculations and were using traditional evaluation techniques because
they considered the methods as needing no pre-requisite knowledge before they could be used.
Practical implications – The study in the paper concluded that there is the need for a restructuring
of the Nigerian real estate education and portfolio evaluation practice and the use of a micro-real estate
specific data derived from local market information to develop property performance indices towards
building up functional real estate indices at the regional and national levels.
Originality/value – This paper is a pioneering attempt at establishing the factors that influenced
the use of implicit techniques in property portfolio diversification evaluation in emerging property
markets like Nigeria.
Keywords Diversification,Nigeria, Real estate
Paper type Research paper
Introduction
The concern for better decision-making in property portfolio performance and
evaluation has received a considerable attention especially in the developed world.
This, in the first instance, is in realisation of the fact that investment scene (property
investment inclusive), throughout the world, is characterised by risk and uncertainty
and ignoring them may bring peril. In the second instance, and arising from the need to
address the problem of risk and uncertainty, the pattern of investment has changed
substantially and investors have seen the safety aspect of having a collection of
investment assets and diversifying through a combination of investment as risk may
be reduced by a trade-off with return. In the same vein, the drive towards the
integration of quantitative analysis, as developed under Modern Portfolio Theory
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Diversification
evaluation
techniques
23
Journal of Property Investment &
Finance
Vol. 25 No. 1, 2007
pp. 23-42
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635780710720153
(MPT), into property portfolio management, performance evaluation and
diversification has increased. For example, studies such as Farragher (1984); Locke
(1986); Grissom et al. (1987); Mueller (1993); Williams (1996); Barry et al. (1996); and
Viezer (2000) have shown that the property professions in USA, Australia and UK are
fast integrating quantitative diversification evaluation techniques into real estate
portfolio management and analysis. The studies also lend credence to the fact that
authors and practitioners alike are supporting sophisticated techniques of
decision-making in property portfolio performance evaluation and analysis.
In Nigeria and most of the developing countries, apart from the fact that little is
known when related to portfolio diversification and evaluation techniques,the quest for
quantitative analysis in property portfolio diversification evaluation is slow when
compared to other part of the developed world.Recent studies (Olaleye, 2000, 2005) have
shown that investors and practitioners are supporting the use of pragmatic/qualitative
evaluation technique of analysis in property portfolio diversification/management.
Furthermore, this technique, most times, did not providethe best protection against the
prevailing risk situation in the market. Thus, with the gradual emergence of large
numbers of passive owners of real estate securities (as a result of the listing of a
property company at the stock exchange) and the more pronounced volatility in the
property market due to unstable market and the degree of inflationin the economy, it is
obvious that property portfolio diversification evaluation, in Nigeria, should go beyond
implicit analysis. It should involve a more explicit and analytical techniques already
embraced in some parts of the developed world. Besides, now that globalisation is fast
integrating every aspect of the world’s economy, there is a real danger in the property
profession remaining conservative and unduly static. For example, there is a danger
that lies in the possibility of clients being disenchanted and the profession rendered
obsolete. There is therefore the need to examine the ways by which the property
portfolio diversification evaluation practice in the Nigerian property market could be
made to adjust to ever changing trendsin this area thereby improving the practice. As a
step towards this improvement, this paper has recognised the need to examine the
factors that have influenced the use of implicit (naı
¨ve) techniques in property portfolio
diversification evaluation in the Nigeria property market.
The remainder of the paper is structured into four sections. Discussions in Section
Two centres on the ideas and concepts dominant in the literature relating to the central
theme of the paper. Section Three focuses on the methodology employed in achieving
the aim of the paper. In Section Four, the results of the cross sectional survey of the
study population (property investors and real estate practitioners) was analysed and
discussed. Section Five (the last section) concludes.
Factors influencing the choice of property portfolio diversification
evaluation techniques
A wide range of diversification evaluation approaches can be identified. These ranged
from a simple rule of thumb to full-scale quantitative techniques. Meanwhile, the
various approaches to portfolio performance evaluation and analysis are divided into
two main categories. The first being the approaches derived directly from portfolio
theory called Modern Portfolio Theory (MPT) based evaluation and the second, the
pragmatic (qualitative) approaches (Hargitay and Yu, 1993).
JPIF
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