The Interest Rate Sensitivity of Real Estate

Journal of Property Research, Vol. 27, No. 1, pp. 61-85, 2010

Swiss Finance Institute Research Paper No. 10-13

45 Pages Posted: 23 Mar 2010 Last revised: 7 Dec 2018

See all articles by Alain Chaney

Alain Chaney

Universitiy of Geneva

Martin Hoesli

University of Geneva - Geneva School of Economics and Management (GSEM); Swiss Finance Institute; University of Geneva - Research Center for Statistics; University of Aberdeen - Business School

Date Written: February 25, 2010

Abstract

This 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.

Keywords: Interest Rate Sensitivity, Duration, Property, DCF, Risk Management

JEL Classification: G12, G22, G23

Suggested Citation

Chaney, Alain and Hoesli, Martin Edward Ralph, The Interest Rate Sensitivity of Real Estate (February 25, 2010). Journal of Property Research, Vol. 27, No. 1, pp. 61-85, 2010; Swiss Finance Institute Research Paper No. 10-13. Available at SSRN: https://ssrn.com/abstract=1574103

Alain Chaney (Contact Author)

Universitiy of Geneva ( email )

102 Bd Carl-Vogt
Genève, CH - 1205
Switzerland

Martin Edward Ralph Hoesli

University of Geneva - Geneva School of Economics and Management (GSEM) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, 1211
Switzerland
+41 22 379 8122 (Phone)
+41 22 379 8104 (Fax)

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

University of Geneva - Research Center for Statistics ( email )

Geneva
Switzerland

University of Aberdeen - Business School ( email )

Edward Wright Building
Dunbar Street
Aberdeen, Scotland AB24 3QY
United Kingdom
+41 22 379 8122 (Phone)
+41 22 379 8104 (Fax)

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