Varying Interest Rate Sensitivity of Different Real Estate Sectors

Although the world emerged strongly from the debilitating COVID-19 pandemic, it presents a unique high inflationary situation, which results in an immediate and significant shift in global monetary policies. Key global central banks’ monetary policies have turned increasingly hawkish and have aggressively increased fund rates, both in speed and magnitude. Importantly, the Federal Reserve’s dot plot signaled a higher-for-longer interest rate environment in 2024 due to inflation continuously above the target range (Federal Reserve, 2023). This report is the first to examine interest rate risk management and institutional investment opportunities of global listed real estate (LRE) sub-sectors in light of the recent global rate hike cycle. The first research theme is to address the quantitative interest rate sensitivity of LRE sub-sectors by using various interest rate proxies, particularly for 10y-2y spread - a leading indicator of projecting economic recession risk (FRBSF, 2022). The second research theme is to assess institutionalized portfolio construction strategies in global LRE across sectors and markets in different phases of interest rate cycles by using mean-downside variance portfolio analysis.