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A comparison of UK equity and property duration

Author

Listed:
  • Foort Hamelink
  • Bryan MacGregor
  • Nanda Nanthakumaran
  • Allison Orr

Abstract

This paper considers the duration of property and equity. A general formula for duration of asset classes is derived. It is shown that calculations which assume, usually implicitly, that the flowthrough of inflation to cash flow is zero, produce misleadingly high durations for property and equities. These are typically in the range 15-25 years. Simulations using the formulae show that property has some bond-like characteristics. The results indicate that, for realistic flow-through rates, equities have a higher duration than property. The flow-through rate is the most important variable in the estimation of equities. Using historical data, equity duration is estimated at 8.65 years and property's at 3.15 years. These are substantially lower than those commonly cited. If these values can be substantiated, and if higher values are used in practice, portfolio immunization strategies may need to be reconsidered.

Suggested Citation

  • Foort Hamelink & Bryan MacGregor & Nanda Nanthakumaran & Allison Orr, 2002. "A comparison of UK equity and property duration," Journal of Property Research, Taylor & Francis Journals, vol. 19(1), pages 61-80.
    • Handle: RePEc:taf:jpropr:v:19:y:2002:i:1:p:61-80
    DOI: 10.1080/09599910110079631
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    Citations

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    Cited by:

    1. Olga Fullana & Juan M. Nave & David Toscano, 2018. "The implied equity duration when discounting and forecasting parameters are industry specific," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(S1), pages 179-209, November.
    2. Shaffer, Sherrill, 2007. "Equity duration and convexity when firms can fail or stagnate," Finance Research Letters, Elsevier, vol. 4(4), pages 233-241, December.
    3. Michael Heinrich & Thomas Schreck, 2018. "The Interest Rate Sensitivity of Institutional Real Estate Investments," LARES lares_2018_paper_112-hein, Latin American Real Estate Society (LARES).
    4. Olga Fullana & David Toscano, 2020. "Performance of Alternative Estimation Procedures of the Implied Equity Duration in a Small Stock Market," Sustainability, MDPI, vol. 12(5), pages 1-13, March.
    5. Jareño, Francisco & Navarro, Eliseo, 2010. "Stock interest rate risk and inflation shocks," European Journal of Operational Research, Elsevier, vol. 201(2), pages 337-348, March.

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