Interest Rate Sensitivity of Real Estate Companies Income Statements

Abstract: Title: Interest Rate Sensitivity of Real Estate Companies’ Income Statements - A Study on the Swedish Market in a Low Rate Environment Seminar date: 11th of January 2018 Course: FEKH89, Bachelor Degree Project in Financial Management, Undergraduate Level Authors: Karl Ågren, Samuel Hammarling and Sebastian Lindeborg Advisor: Anamaria Cociorva Key words: Real estate companies, repo rate, income statement sensitivity, pricing of debt, mixed methods research Purpose: The purpose of this study is to empirically investigate the sensitivity of Swedish real estate companies’ income statements towards a 100 basis point increase in the Riksbank’s repo rate. Methodology: A mixed methods research approach is employed. Qualitative research and theory constitute the framework for this study, to later be validated against the findings from three multiple regressions. Theoretical perspectives: Robert C. Merton’s theory of pricing corporate debt is, together with the findings of this study’s qualitative research, used as framework for this study. Empirical foundation: The qualitative research of this study consists of semi-structured interviews with six market experts. The quantitative research is constituted by company data and macro data: The company data includes a sample of ten companies over a ten year period, amounting to 100 firm-years. The macro data constitutes 521 observations over a ten year period. Conclusions: The study can confirm the sensitivity of Swedish real estate companies’ income statement towards changes in the Riksbank’s repo rate. The findings imply that two items are affected, interest expenses and revaluation of properties. A hypothetical 100 basis point increase in repo rate implies, according to the results, a 212 basis point decrease in revaluation of properties and a 40 basis point increase in interest expenses. This study’s focus on income statements complements previous literature that largely focuses on real estate companies’ returns and probability of default. Furthermore, the study investigates the effects of interest rates in the current unique low rate environment in Sweden, strengthening the research on the effects of low central bank rates.