EFFECT OF INTEREST RATES ON REIT PRICES & YIELDS

Abstract

This paper uses three tests - the Paired-Samples T-Test, Pearson's Correlation Coefficient and Runs Test of Randomness, to empirically study the effect of interest rates on locally listed Real Estate Investment Trusts (REIT) prices and yields. The results show that, contrary to theory, a positive and significant relationship exists between the various interest rates tested and local REITs. When examined across decreasing, constant and increasing interest rate scenarios, the mean increase in REIT prices was larger when interest rates were raised than when interest rates were lowered. The general order of correlation is as follows: LIBOR, T-Bills, SIBOR, FFR, T-Notes and then T-Bonds. A positive and significant relationship was also found between interest rates and major indices worldwide suggesting rate-hikes were very much inline with index movements internationally. For investors who are preparing to take the leap of faith into the local REIT investing arena, the results imply that the REIT prices are not random and even quite predictable, and an investment pattern can be determined to reap supernormal profits.