Assessing the Time-Varying Interest Rate Sensitivity of Real Estate Securities

Simon Stevenson, Patrick Wilson () and Ralf Zurbruegg

ERES from European Real Estate Society (ERES)

Abstract: This study aims to examine the relationship between interest rate movements and the price reaction of UK property stocks. While previous exists concerning the sensitivity of indirect real estate vehicles to interest rates, this study extends this literature by examining the time-varying sensitivity of property companies. Unlike REITs, which are limited in the level of leverage they can utilize, property companies are generally highly geared stocks, making the impact of interest rates highly important to the firms. Not only should interest rate movements have an impact due to their impact on the real economy and the direct real estate markets, but there will also be a direct impact upon the stocks due to their highly geared nature. A large number of studies have examined interest rate sensitivity in a real estate context, with a large number having examined REITs (e.g. Chen et al., 1997, Chen & Tzang, 1988, Liang & Webb, 1995, Ling & Naranjo, 1997, McCue & Kling, 1994, Mueller & Pauley, 1995, Swanson et al, 2002). This study extends this literature and particularly those recent studies to have examined time-varying aspects of real estate securities (Devaney, 2001). The paper also utilizes the broader literature that has analyzed the interest rate sensitivity of stocks generally. In particular, there is a large collection of papers to have examined the issue in specific relation to bank stocks (Choi et al, 1992, Elyasiani & Mansur, 1998 and Flannery et al., 1997). The data used in this study comprises of data over the period 1993 through 2003. The FTSE Property sector index is used to represent UK property stocks. The overnight Sterling LIBOR is used as a proxy for market rates. The paper examines the timevarying sensitivity of property stocks using a GARCH based framework. For comparative purposes, and in particular to allow comparisons with the studies of bank stock reaction, we also examine the reaction of property company stock prices to discount rate announcements. Bank of England base rate changes are used in this context to examine the immediate reaction to central bank rates.

JEL-codes: R3 (search for similar items in EconPapers)
Date: 2005-01-01
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Citations: View citations in EconPapers (1)

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Journal Article: Assessing the Time-Varying Interest Rate Sensitivity of Real Estate Securities (2007)
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