Market competitiveness

Introduction

Time series have been employed in this chapter to generate nominal and real returns as additional performance indicators for the dominant real estate market in Ghana. The first part presents quantitative and comparative analysis of the market against other investment vehicles in the country. An international perspective of the performance of the residential investment market is analysed in the second part. This approach is intended to provide indicators that form the basis for modelling the causal relationships between real estate market and the economy.

Ghana has since 1992 enjoyed a stable democracy and is widely considered as a regional model for political and economic reforms in sub-Saharan Africa. The quality' of its investment climate is defined by' the perceived level of corruption in the country'. Out of 180 countries considered for the Transparency International Corruption Perception Index 2019, Ghana is ranked 80th with a score of 41, above its African peers such as Nigeria (146th), Tanzania (96th), Kenya (137th) and Uganda (137th). Seychelles (27th), Namibia (56th) and South Africa (70th) nonetheless, outperformed Ghana (Transparency International, 2020).

Understanding the fundamentals of investment vehicles

There is a huge potential foreign direct investment (FDI) into emerging economies such as Ghana with a possibility' that most of these investments would manifest in the real estate market. The volume of international money transferred into Ghana has increased significantly in recent years, in part as a response to the growing real estate market. This viewpoint is accentuated by the massive stock of residential units that have emerged in the well-established prime neighbourhoods of Airport Residential, Cantonments, Labone, Ridge and in the fast- growing neighbourhoods such as East Legon Extension, North Legon and Airport East in Accra and other urban centers.

The contribution of real estate to national economy has been measured by studies using macroeconomic indicators such as GDP (see Hetherington, 1988;

Market competitiveness 85

Gardiner and Henneberry, 1988, 1991; Crosby and Keogh, 1990; Liang and Gordon, 2003). Whilst the value of commercial real estate generally is equivalent to 45 percent of GDP in mature developed countries, Hughes and Aris-sen (2005) estimates the contribution of higher quality real estate at less than 45 percent of GDP for developing countries. A number of countries, including Ghana, in sub-Saharan Africa continues to demonstrate a growing real estate investment markets that offer new investment opportunities. By employing the formula1 of Hughes and Arissen (2005), the value of investible real estate market in Ghana is assessed at 15.2 percent of GDP.

As far back as 1968, it was envisaged that the establishment of a stock market in Ghana would serve as a significant component of economic development. However, due to an unstable political and economic environment as well as lack of political will, the establishment of a functional stock market was long delayed. It was not until November 1990, when under the Stock Exchange Act, 1971 (Act 384), the first trading of the Ghana Stock Exchange (GSE) was conducted (Ghana Stock Exchange, 2006). Using the index of stock market capitalisation to GDP ratio, Yartey (2006) describes the GSE as not very important in the fust four years of its establishment. The stock market capitalisation as a proportion of GDP, however, climbed to 35 percent in 1994, very close to the world average of 38.2 percent. The GSE itself calculates and publishes the GSE All-Shares Index, covering all listed equities. The base for the GSE Index is December 1993, one year later than the base of the performance calculated for residential investments in the country.

To give a full comparison of the local equity market with residential investment, an alternative source of stock market performance has been used, the Databank Index produced for the same period — 1992 to 2007 - by Databank Group. This company tracks the market’s performance from 1990, covering all stocks listed on the GSE, and showing annual price changes and dividend yields. As at December 2007, there were 32 GSE-listed companies, with a total market capitalisation of USS 1.32 billion.

Benchmarks for comparison

Figure 6.1 presents yields for residential market, equities and treasury bills (T-bills) as well as residential income returns and rates of inflation from 1992 to 2007. Stock market dividend yields were high from 1992 to 1997, when yields escalated to 13 percent. From 1998 to 2002, with a decline in the rate of inflation, yields settled at lower, more stable rates between 6 percent and 7 percent. The period 2004 to 2007 recorded a sharp dip in dividend yields, falling to 2 percent by the end of 2007. Over the period 1992 to 2007, dividend yields averaged at 6 percent. Yields on T-bills had also reflected the downtrend in the rate of inflation, falling from a peak of 43 percent in 1997 to 10 percent in 2006 and 2007. At these levels, T-bills yields were in line with rates of inflation.

Residential yields showed a different trend over time from those of other assets, remaining relatively flat despite the change in the rate of inflation. The

86 Market competitiveness

Residential, equity, T-bills yields and inflation rates (percent)

Figure 6.1 Residential, equity, T-bills yields and inflation rates (percent): 1992-2007

reversionary residential yields were close to or below equities dividend yields up to 1997, but ran well above equities yields between 2003 and 2007. The residential yield determination was elevated by the high level of reversions produced by high rates of nominal rental growth, especially in the 1990s. Residential income returns therefore provided a more appropriate comparison with equity dividend and T-bills yields. Rates of income return were well below equity dividend yields up to 2002, but by the end of 2007 had risen to 3.8 percentage points above equities, the largest margin in the history of the series.

Figures 6.2 and 6.3 compare the total returns across Ghanaian asset classes set against the rate of inflation, and Table 6.1 summarises performance over the 16 years.

Over the full period, both returns and risks across the asset classes fall in line with the expectations of investment theory. T-bills, with variation in returns driven solely by interest rate movements, showed the lowest risk and lowest return of the three. Equities, characterised by highly uncertain and variable dividend distributions and capital values, showed the highest return and highest risk. Residential real estate, with a blend of fixed rental incomes determined by leases, and variable incomes on review and relettings determined by rental growth, showed both returns and risks between T-bills and equities. Expressed as a Sharpe Ratio (asset return less T-bills return divided by standard deviation of the asset), the risk adjusted excess returns on residential real estate at 0.49 was marginally above that on equities at 0.45. Against other asset classes in Ghana, therefore, residential real estate had offered a competitive return, commensurate with its risk. Residential investment had also provided more consistent returns than equities (see Figures 6.2 and 6.3). The rate of return on residential investment did not dip below zero in any of the 16-year history, against two for

Market competitiveness 87

Annual total returns by asset class (percent pa) Cedis (£)

Figure 6.2 Annual total returns by asset class (percent pa) Cedis (£): 1993—2007

Total return indices by asset class, Cedis {

Figure 6.3 Total return indices by asset class, Cedis {

equities in the same period. Similarly, the annual return on residential investment lagged below inflation in only two out of 16 years, compared to seven years with sub-inflation returns on equities, and five years with sub-inflation returns on T-bills. Again, residential investment produced a return below that of T-bills in five years of the period, compared to seven for equities.

88 Market competitiveness

Table 6.1 Ghanaian investments annualised total returns; Cedis percent pa

Residential real estate

Equities

T-Bills

Nominal total return %

per annum

Annualised

37.2

42.7

27.2

mean

38.9

51.1

27.7

Standard deviation

22.9

52.1

10.3

Table 6.2 Correlations in annual returns across asset classes; Cedis

Correlation matrix

Residential real estate

Equities

T-Bills

Residential real estate

1.00

Equities

-0.08

1.00

T-bills

0.48

0.12

1.00

Residential markets also offered investors the strong diversification benefits normally associated with assets portfolios (Table 6.2). The correlation between residential real estate and equities was not statistically different from zero, and the correlation with T-bills was moderate at 0.48.

 
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