INTEREST RATE SENSITIVITY OF PROPERTY COMPANIES

Abstract

This study examines the sensitivities of property stock returns to interest rate changes and how various company characteristics influence it. At the macro level, the returns of the Singapore Property Shares Index from the period of 1990 to 2000 are regressed against market and interest rate changes. The results reveal that interest rates have a significant and negative influence on property stocks returns. At the firm level, using the returns of 21 locally listed property stocks, a rolling regression technique is performed to examine the interest rate sensitivities across the firms and over time. Out of the 21 property stocks, the finding shows that 20 property companies are sensitive to interest rate changes and all have different levels of interest rate sensitivity. The determinants of companies' interest rate sensitivities are examined using firm specific characteristics and market-related factors. The empirical test reveals that companies' interest rate sensitivities are influenced by firm specific characteristics. In particular, the results show that financial leverage, degree of specialisation and management structure are significant determinants of the companies' sensitivity to interest rate risk. Asset structure, however, do not appear to have any significant effect on interest rate sensitivity. The result also shows that market related factors, such as size and book to market ratio, do not have significant effect on the companies' interest rate sensitivities.