Abstract:
This paper examines the information content of the U.S. term structure of interest rates on the
market for real estate investment trusts (REITs) by decomposing the term structure of U.S.
Treasury yields into two components that reflect the expectations factor and the maturity premium.
We show that the expectations factor component of the U.S yield curve has significant explanatory
power over return volatility in REIT stocks, both in the U.S. and globally, even after controlling
for stock market trading activity. The expectations factor is generally found to have a positive
effect on REIT market volatility, more significantly for the U.S. and Japanese REITs, highlighting
the role of global funding conditions (via expected short rates) on return fluctuations in real estate
markets. Comparing the findings for the pre- and post-global crisis periods, however, we find that
the U.S. term structure has largely lost its explanatory power over global REIT markets, implied
by largely insignificant effects during the post-global crisis period. The findings highlight the
changing dynamics in REIT investments in the aftermath of the 2018 global credit crunch, possibly
due to the slowdown of investments in the real estate sector globally, and suggest that investors
will have to focus more on the idiosyncratic risk factors that drive these markets.
