The Interest Rate Sensitivity of Real Estate
AbstractThis study yields a contribution to a better understanding of the interest rate sensitivity of real estate and should enable a more sophisticated interest rate risk management, especially for insurance companies and pension funds. This is achieved by modelling the whole life of a typical but simplified office investment property, based on a representative and exclusive data set for the Swiss investment real estate market. The interdependencies between interest rates, inflation, office market rents, current rent paid and expenses are modelled empirically. We perform Monte Carlo simulations that explicitly incorporate the uncertainty of the underlying stochastic processes, of their interdependencies and of modelling uncertainties, thus providing an indication of the final estimate’s uncertainty. Our results show that the interest rate sensitivity of a typical office property is 13.1%, with a standard deviation of 7.8%. The risk premium, the state of the macroeconomic environment, the degree of rotation of the interest curve and the remaining lifetime of the property are found to be the prime determinants of interest rate sensitivity.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 10-13.
Length: 45 pages
Date of creation:
Date of revision: Feb 2010
Interest Rate Sensitivity; Duration; Property; DCF; Risk Management;
Other versions of this item:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
- G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
You can help add them by filling out this form.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marilyn Barja).
If references are entirely missing, you can add them using this form.