Effect of Inflation on Returns of Commercial Real Estate in South-South Nigeria

Abstract

Commercial real estate investment returns have now taken on a greater significance in the development of the economy of any nation. The aim of this study was to evaluate the effects of inflation on the rate of returns in the South-South geopolitical zone of Nigeria. In order to attain the stated aim, the following objectives were set; to examine the inflationary trend in the study area; to determine the rate of returns of commercial properties in the study area and to establish a relationship between the inflation rate and rate of returns of commercial properties in the study area. The research employed the survey design. The independent variable was the inflation rate while the dependent variable was the rate of returns. Both descriptive and inferential statistics were employed in the analysis of the data, with the help of the SPSS and Microsoft Excel software. Primary data for this research was obtained from Estate Surveyors and Valuers in the study area through questionnaire survey. The data comprising rental and capital values of commercial real estate was subsequently translated to returns using the Holding Period Returns formula. Similarly, secondary data about inflation rates for the period between 2016 and 2024 were collected from the Central Bank of Nigeria. The Consumer Price Index and the 364-day Treasury Bills were used as proxies for the actual and expected inflation, while their differences were used as the unexpected inflation. The research adopted the stratified random sampling technique to divide the South-South geopolitical zone of Nigeria into six (6) strata: each stratum representing each state, and the data used for the research were analysed using simple linear regression model. The study revealed that the highest average capital value of commercial real estate in the south-south geopolitical zone was ₦43,538,515; while the highest average rental value of N1,500,000. It was also found out that the highest average rate of return of commercial real estate investment in the study area was 15.59% and the lowest average rate of return was 11.08%. The study revealed that there was a significant relationship between actual inflation rates and the rate of returns of commercial real estate in the study area with R-squared value of 64% and F-ratio of 12.51334, but there were no significant relationships between returns and expected inflation as well as unexpected returns.