The Sensitivity of UK Commercial Property Values to Interest Rates Changes

Bryan D. MacGregor, Nanda Nanthakumanran, Allison M. Orr

    Research output: Contribution to journalArticle

    1 Citation (Scopus)

    Abstract

    Duration and convexity measures are commonly applied in the management of bond portfolios to measure the sensitivity of asset values to changes in interest rates, enabling fund managers to manage their exposure to interest rate risk. Yet, there are no commonly accepted methods for applying the concepts of duration and convexity to equities and real estate, making it difficult for fund managers to analyse the exposure of multi-asset portfolios to interest rate risk [Blitzer and Dash, 2004].

    This paper contributes to this underdeveloped area of interest rate risk management by assessing the accuracy of using duration and convexity to measure the sensitivity of commercial property values in the UK to discount rate movements. Simulations confirm that property has duration and convexity characteristics similar to bonds. Our estimates overlap with duration figures estimated by Cairns and Wilkie (2010) for conventional British Government bonds over 15 years but are higher than their estimates for 5 to 15 year gilts. Perhaps more importantly, the paper demonstrates that duration is not sufficiently reliable enough to mitigate the interest rate risk attached to a property portfolio. The inclusion of convexity is necessary for effective interest rate immunisation strategies.
    Original languageEnglish
    Pages (from-to)123-151
    Number of pages29
    JournalJournal of Property Research
    Volume29
    Issue number2
    Early online date3 Jan 2012
    DOIs
    Publication statusPublished - 2012

    Fingerprint

    interest rate
    Values
    assets
    government bonds
    manager
    discount rate
    immunization
    real estate
    risk management
    equity
    inclusion
    simulation
    management

    Keywords

    • interest rate risk
    • duration
    • convexity
    • asset-liability matching

    Cite this

    The Sensitivity of UK Commercial Property Values to Interest Rates Changes. / MacGregor, Bryan D.; Nanthakumanran, Nanda; Orr, Allison M.

    In: Journal of Property Research, Vol. 29, No. 2, 2012, p. 123-151.

    Research output: Contribution to journalArticle

    MacGregor, Bryan D. ; Nanthakumanran, Nanda ; Orr, Allison M. / The Sensitivity of UK Commercial Property Values to Interest Rates Changes. In: Journal of Property Research. 2012 ; Vol. 29, No. 2. pp. 123-151.
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