Varying interest rate sensitivity of different property sectors: cross-country evidence from REITs
| DOI | https://doi.org/10.1108/JPIF-09-2020-0099 |
| Published date | 05 April 2021 |
| Date | 05 April 2021 |
| Pages | 68-98 |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
| Author | Yu-Cheng Lin,Chyi Lin Lee,Graeme Newell |
Varying interest rate sensitivity of
different property sectors:
cross-country evidence
from REITs
Yu-Cheng Lin and Chyi Lin Lee
School of Built Environment, University of New South Wales, Sydney, Australia, and
Graeme Newell
School of Business, Western Sydney University, Sydney, Australia
Abstract
Purpose –Recognising that different property sectors have distinct risk-return characteristics, this paper
assesses whether changes in the level and volatility of short- and long-term interest rates differentially affected
excess returns of sector-specific Real Estate Investment Trusts (REITs) in the Pacific Rim region between July
2006 and December 2018. The strategic property risk management implications for sector-specific REITs are
also identified.
Design/methodology/approach –Daily excess returns between July2006 and December 2018 are used to
analyse the sensitivity in the level and volatility of interest rates for REITs among office, retail, industrial,
residentialand specialtyREITs across the USA, Japan,Australia and Singapore.The generalisedautoregressive
conditionallyheteroskedastic in themean (GARCH-M) methodologyis employed to assess the linkagebetween
interest ratesand excess returns of sector-specificREITs.
Findings–Compared with diversifiedREITs, sector-specific REITs were less sensitive to short- and long-term
interest rate changes across the USA, Japan, Australia and Singapore between July 2006 and December 2018. Of
sector-specific REITs, retail and residential REITs were susceptible to interest rate movements over the full
study period. On the other hand, office and specialty REITs were generally less sensitive to changes in the level
and volatility of short- and long-term interest rate series across all markets in the Pacific Rim region. However,
the interest rate sensitivity of industrial REITs was somewhat mixed. This sector was sensitive to interest rate
movements, but no comparable evidence was found since the onset of GFC.
Practical implications –The insignificant exposure to interestrate risk of sector-specificREITs may imply
that they have a stronger interest rate risk aversion and greater hedging benefits than their diversified
counterparts,particularlyfor office and specialtyREITs. The resultssupport the existenceof REIT specialisation
valuein the Pacific Rim regionfrom the interestrate risk management perspective.This is particularlyvaluableto
international property investors constructing and managing portfolios with REITs in the region. Property
investorsare advisedto be aware of the disparitiesin the magnitudeand directionof sensitivity to theinterest rate
leveland volatility of REITsacross differentproperty sectorsand various markets inthe Pacific Rim region.This
study is expected to enhanceproperty investors’understanding of interest raterisk management for different
property typesof REITs in local, regionaland international investmentportfolios.
Originality/value –The study is the first to assess the interest rate sensitivity of REITs across different
property sectors and various markets in the PacificRim region. More importantly, this is the first paper to offer
empirical evidence on the existence of specialisation value in the PacificRim REIT markets from the aspect of
interest rate sensitivity. This research may enhance property investors’understanding of the varying interest
rate sensitivity of different property types of REITs across the USA, Japan, Australia and Singapore.
Keywords Pacific rim region, Interest rate sensitivity, Sector-specific REITs, Multiple property sectors,
Specialisation value, GARCH-M model
Paper type Research paper
JPIF
40,1
68
The authors would like to acknowledge the comments of the anonymous referees, Professor Joseph Ooi
(NUS) and Professor David Harrison (UCF) at the Pacific Rim Real Estate Society conference and
participants at the American Real Estate Society.
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1463-578X.htm
Received 14 September 2020
Revised 11 November 2020
19 December 2020
21 February 2021
Accepted 18 March 2021
Journal of Property Investment &
Finance
Vol. 40 No. 1, 2022
pp. 68-98
© Emerald Publishing Limited
1463-578X
DOI 10.1108/JPIF-09-2020-0099
Introduction
Real Estate InvestmentTrusts (REITs) have become a significant listed propertysector in the
internationalproperty investment space, offering benefitsof liquidity, transparency and fiscal
efficiency. REITs have been seen as an institutionalised property sector in the international
context (Devos et al.,2013;Aguilar et al.,2018;Ling et al., 2019). Institutional ownershipas a
proportion of total ownership of REITs increased from 14.1% in 1990 to 75.2% in 2011,
including financial institutions, securities companies, insurers, pension funds and sovereign
wealth funds (An et al., 2016).
Table 1 portraysthe significanceof Pacific Rim-basedREITs in the internationalcontext. As
of December2018, four out of five leadingglobal REITs werein the Pacific Rim region,namely
the USA, Japan, Australia and Singapore. The market capitalisation of these four markets
accounted for US$1.3 trillion, contributing 78.1% of the total assets of the global REIT m arket.
One of theprominent attributesof Pacific Rim-basedREITs is that sector-specificREITs play a
major role in the markets. Table 2 shows that the percentage of sector-specific REITs to
composite REITs by market capitalisation as of December 2018 was 92.8% in the USA, 74.7% in
Japan, 71.9% in Australia and 87.7% in Singapore. This has seen sector-specific REITs as a
dominantplayer in the PacificRim REIT markets comparedwith their diversifiedcounterparts.
The prominent role of sector-specific REITs is consistent with the increasing investment
appetite of investors, particularly sophisticated institutional investors who intend to make
sectoral diversification decisions themselves, rather than passively relying on diversified
players (Newell and Tan, 2003;Case et al.,2010). Managementexpertise can be more effective
when a REIT is specialised by property type (Geltner et al., 2014). The preference for
sector-specific REITs can be explained by the effect of firm specialisation assertion in the
Rank Market No. of REITs Market cap (US$ B) % of global REITs
1 US 195 996.9 61.8
2 Japan 59 111.8 6.9
3 Australia 46 89.6 5.6
4 UK 57 67.4 4.2
5 Singapore 40 62.6 3.8
Source(s): Authors’compilation/analysis from EPRA (2018),NAREIT (2018) and the constructed database
Market cap
Markets Composite REITs Sector-specific REITs
a
% of composite REITs
US 996.9 925.4 92.8
Japan 111.8 83.5 74.7
Australia 89.6 64.4 71.9
Singapore 62.6 54.9 87.7
No. of REITs
Markets Composite REITs Sector-specific REITs
a
% of composite REITs
US 195 179 91.8
Japan 59 41 69.5
Australia 46 36 78.3
Singapore 40 36 90.0
Note(s):
a
Categorised by the GICS
Source(s): Authors’compilation from NAREIT (2018) and the constructed database
Table 1.
Profiles of leading
global REITs:
December 2018
Table 2.
Significance of sector-
specific REITs in the
Pacific Rim: December
2018 (US$ B)
Interest rate
sensitivity of
property
sectors
69
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