An Empirical Analysis of Real Estate Portfolio Diversification and Return Optimisation in Nigeria

This study empirically analyses the diversification benefits and return optimisation potential of real estate portfolios in Nigeria, constructing efficient frontier analyses for different portfolio combinations using historical return data across property sectors and geographic markets. Modern portfolio theory has been extensively applied to real estate investment internationally but its application to Nigerian real estate data presents unique challenges related to data availability, market depth, and the characteristics of return series in a high-inflation emerging market. Historical return data covering total returns, income returns, and capital growth are assembled for five property sectors (residential, office, retail, industrial, and hospitality) across three geographic markets (Lagos, Abuja, and Port Harcourt) over a ten-year period from secondary market reports and primary estate surveyor data. Pairwise correlation matrices are computed to identify diversification benefits across sector-geography combinations. Mean-variance efficient frontiers are estimated and portfolios are stress-tested against inflationary and naira depreciation shock scenarios relevant to Nigerian macroeconomic conditions. Results demonstrate that sector diversification provides significant variance reduction relative to single-sector portfolios, with retail and residential return correlations being among the lowest in the full matrix. Geographic diversification beyond Lagos provides meaningful but less substantial variance reduction. Hospitality real estate shows the highest return volatility and the weakest correlation with other sectors, offering the most significant diversification contribution on a risk-adjusted basis. The study provides the first comprehensive Nigerian real estate diversification evidence and recommends its use as a portfolio construction reference by Nigerian property investment managers. Keywords: real estate portfolio, diversification, modern portfolio theory, efficient frontier, Nigeria.