South African listed real estate as protection against inflation

Abstract

This research aims to shed light on the relationship between the South African CPI inflation and JSE-listed property index returns. Furthermore, the relationship between the South African CPI inflation and JSE-all share index returns was modelled with the intent of comparing the relationship to that of JSE-listed property index (versus South African CPI). The short-term relationship between CPI inflation and JSE-listed property index returns was discovered to be negative for the period starting from Jan 2005 to Jun 2015, in the other hand, the relationship between the JSE-all share index returns and CPI inflation was seen to be positive over the same period. The study also tests for the consistency of the relationships between the JSE-listed property and JSE-all share returns (against CPI inflation) to changes in the South Africa repo rate cycles (over the period starting from Jan 2005 to Jun 2015). The results show that a change in the repo rate cycle changes the sign of the CPI inflation coefficients of the short-term relationships, which indicates that the relationships are unstable (for the short-term case). Moreover, cointegration models were fitted to determine the existence of a long-term relationship between the JSE-all share and JSE-listed property indices (against the South Africa CPI index). The results of the long-term relationships indicate a meaningful economic relationship between the JSE-listed property index and the CPI the Hansen instability test proved the relationship to be stable. On the other hand, the relationship between the CPI and the JSE-all share index was not meaningful (it failed both the Hansen instability as well as the Engle and Granger tests).