To read this content please select one of the options below:

What is the “duration” of Swiss direct real estate?

Mihnea Constantinescu (Swiss Finance Institute, University of Zurich, Zurich, Switzerland)

Journal of Property Investment & Finance

ISSN: 1463-578X

Article publication date: 27 April 2010

810

Abstract

Purpose

Computing the duration of real estate assets is a challenging task due to the particularities of the property market. This paper aims to develop an empirical model to compute the interest‐rate sensitivity of direct real estate assets in the Swiss multifamily housing market.

Design/methodology/approach

An aggregated total return index is used to empirically estimate the interest‐rate sensitivity of the underlying assets in a dynamic DCF model. No instantaneous change is computed but a long‐run price adjustment.

Findings

The long‐run sensitivity is computed to be roughly 4.5 per cent. The value is found to be statistically significant at the 1 per cent level. The model is estimated over two different time periods and the estimate remains significant over both periods with value changing marginally. Potential reliance of trends when forming expectations is found to be present.

Research limitations/implications

One limitation is that the computed value is valid for a portfolio having a similar composition with the index used for the empirical estimation.

Practical implications

The value of the interest‐rate sensitivity places Swiss direct real estate assets within the European range. The value may be used to compute the risk‐based capital of an institutional investor in as far as the portfolio is similar in composition with the index.

Originality/value

The use of the dynamic DCF model allows one to split the changes in asset prices in changes from interest‐rates and changes from cashflows. No value was previously available for the market of Swiss multifamily properties.

Keywords

Citation

Constantinescu, M. (2010), "What is the “duration” of Swiss direct real estate?", Journal of Property Investment & Finance, Vol. 28 No. 3, pp. 181-197. https://doi.org/10.1108/14635781011048849

Publisher

:

Emerald Group Publishing Limited

Copyright © 2010, Emerald Group Publishing Limited

Related articles