The debt maturity structure of UK property companies

Abstract

This paper investigates the corporate debt maturity structure of property companies quoted in the UK over the period 1989-95. The empirical results show that there is scope for property firms to signal to the market their true worth using their debt maturity decisions. In particular, the evidence shows that property companies with potential good news employ more short-term debt in their capital structure, which is consistent with the signalling hypothesis. The study also reveals that firms which are large, enjoy high returns, or are more focused on property trading employ more long-term debt in their capital structure. The evidence is also consistent with the conventional notion that property companies match their debt maturity to the life of the assets. The matching practice, however, is not done primarily on the basis of minimizing the agency costs of long-term debt. The empirical results are also consistent with the traditional notion that managers time their long-term debt issues based on the prevailing real estate market condition and their expectation of future interest rate movements. The evidence weakly suggests that property companies defer their long-term debt issues when interest rates are predicted to fall in the near future. Interest rate volatility, however, do not appear to have any significant influence on the debt maturity policy of property companies.