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

Abstract

This paper examines the sensitivity of real estate securities to changes in both market and central bank interest rates. It is commonly viewed that the traded real estate market is one of the industry sectors most susceptible to interest rate movements. This is due to traditional high levels of borrowing, the impact of rate changes on property yields and indirectly upon occupational demand and thus rental income. The results which are the first to examine the UK sector, highlight the impact of interest rates on UK property companies, in relation to both returns and volatility. The paper also illustrates that this sensitivity is not confined to periods of high and volatile interest rates as the sample period under examination is characterized by historically low and stable rates.