rates possibly induce investment flows to the apartment market where the rental price level
generally can be adjusted relatively rapidly to cater for changes in the general price level.
After an unexpected increase in the T-bill rate, in turn, we would expect a decline in
real estate prices due to an increase in the discount factor. A potential explanation for the
observed positive reactions to a T-bill shock is given by the expectations theory of the term
structure together with the Fisher hypothesis. Generally, higher short-term interest rates are
expected to diminish economic activity thereby reducing inflation pressures. Lower inflation
expectations, in turn, induce lower long-term interest rates (Howells and Bain, 2008). Given
that real estate is a long-horizon investment vehicle, the long-term expectations (regarding
interest rates and inflation) may well dominate the short-term effects in some markets. The
generally negative impact of greater term spread on real estate prices is expected and relates
to the greater expected increases in the level of interest rate and therefore in the discount
factor.
Expectedly, the reactions (at least all the statistically significant ones) to shocks in
economic growth and growth expectations are positive. Both these shocks anticipate larger
cash flows for real estate investments. The initial positive reaction and generally negative
lagged (though statistically insignificant) impact of sentiment and GDP shocks to REIT
returns implies that REIT prices may overreact to sentiment and income shocks at first.
Growth in the risk premium increases the discount factor for risky investments and thereby
decreases REITs prices, as expected. However, the impact of a risk premium shock on of_tbi
appears to be positive and also apt_tbi seems to respond positively to a risk shock after an
initial negative reaction. This may appear somewhat surprising at first. Nevertheless, there is
probably a logical explanation for this finding: direct real estate is often conceived as a
relatively safe investment vehicle. Therefore, greater risk aversion can induce flight-to-safety
from more risky assets to direct apartment and office markets thereby increasing demand in
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