The Sensitivity of European Publically Listed Real Estate to Interest Rates

Abstract

A large number of studies have previously examined the effect of interest rate changes on the securitised real estate market. However, the majority have focused on aggregate index level data. Few studies have been undertaken on micro-level data. These lead to a question of whether previous findings can be generalised to individual firms. This study considers the impact of interest rate changes on European listed real estate companies. Using data since 1990 we examine both the aggregate index level sensitivity of European public real estate and also consider the micro-level firm specific sensitivity. Specifically, the study examines the following questions:1: Do interest rate changes have a significant impact on European real estate stocks? 2: Do real estate stocks in different markets behave differently in terms of their interest rate sensitivities?3: Do firm characteristics affect the interest rate sensitivity of real estate stocks?4: Has the interest rate sensitivity of real estate stocks changed pre, during and post financial crisis and quantitative easing ?By answering these questions, this study will offer contributions to the following areas. First, we extend the limited studies on interest rate sensitivity to European real estate markets, particularly emerging European property markets. Second, this study is the first to explicitly examine the linkages between real estate firm characteristics and interest rate sensitivity based on an international large sample. Thirdly, this is one of the first pieces of research to examine the impact of the financial crisis and quantitative easing on the interest rate sensitivity of listed real estate vehicles. The volatility of interest rates in Europe since the GFC means that a fuller understanding of interest rate sensitivity of real estate stocks over different market conditions is of importance for investors’ decision-making.