Research from REP looks at the sensitivity of European listed real estate to interest rates
1 April 2015
An EPRA funded report by Professor Simon Stevenson and colleagues looks at the sensitivity of European listed real estate to interest rates.
An EPRA funded report by Professor Simon Stevenson from Real Estate & Planning and colleagues looks at the sensitivity of European listed real estate to interest rates. The importance of interest rates and the broad credit markets have been clearly illustrated over the last decade. Many markets saw a credit boom pre-2007 whilst the initial crisis of 2007 was centred around both the fall-out from the US subprime market and the drying up of liquidity in the credit markets. Furthermore, many of the longer term repercussions have had credit market elements, such as the European sovereign debt crisis, while interest rates have been reduced to levels not seen in modern times. The need to fully understand the sensitivity of assets to interest rates has therefore been brought into sharp focus.
New research undertaken by Simon Stevenson, Professor of Real Estate Finance & Investment, together with colleagues Chyi Lin Lee (University of Western Sydney), Alexey Akimov (Lancaster University) has examined the sensitivity of the European public real estate sector. Not only does the research consider a number of European markets not previously examined in depth but it also provides a comprehensive analysis of firm level exposure as well as market level sensitivity. The country level results reveal a significant degree of sensitivity in the majority of markets in terms of both returns and volatility. The firm level analysis is based on a sample of 226 publicly traded European real estate securities from 1995 to 2013. The results highlight that the individual characteristics of the firms significantly impacts upon their exposure, of particular note we find that REITs are less sensitive that property companies. Leverage is found to be a key determinant in the interest rate sensitivity observed. This is true when considering both short and long-term interest rates and when the sensitivity in volatility as well as returns is considered. Whilst generally not as consistent the other variables considered also provide some significant results. These variables include market capitalisation, book-to-market, trading volume/turnover, firm age and the asset structure of the firm.
The research was funded by EPRA and the full report is available to EPRA members at http://www.epra.com/research-and-indices/academic/. Elements of the firm level analysis are to be presented at the 2015 American Real Estate Society annual meeting to be held in Florida this month.