Impact of Interest Rate Movements on A-REITs Performance Before, During And After The Global Financial Crises

The Global Financial Crisis (GFC) created a decline in financial market conditions which impacted AREITs with a fall of 70% in 2009. Those A-REITs with higher debt levels were significantly affected and lead to the collapse and recapitalisation of several leading A-REIT's. Since the GFC, with low interest rates the A-REITs have performed well compared to the broader stock and bond markets. The research investigates the impact of leverage and interest rate movements on A-REITs performance during three distinct segments of the economic cycle: pre-GFC (prior to September 2007), GFC (September 2007 - August 2009) and post-GFC (after August 2009). The analysis was undertaken over a 20 year period (1995-2015) involving A-REIT returns, macro-economic data, with the 90-day bank bill yield and 10-year government bond yield rates used respectively for short-term and long-term interest rate proxies. Findings indicate that in terms of the asset pricing tests, funds prior to the GFC did not exhibit much sensitivity to changes in interest rates. Changes in long term interest rates had a significantly negative impact on fund returns in low debt and high debt A-REIT portfolios. The results also show that during the GFC, market risk increased sharply both in magnitude and significance. In the post GFC recovery phase, market risk diminished in magnitude but inflation featured more prominently. Interest rates became a less significant driver of fund returns possibly due to already low levels of interest creating an environment of cheap credit. Similar patterns were observed in size-sorted portfolios. Overall, in the years prior to the GFC, medium and large firms exhibited a negative relationship with long term interest rates. During the GFC, market risk became a much stronger driver of fund returns. Market risk became less prominent in the years after the GFC with long term interest rates being significant in large firms only.