Analyzing the Impact of Interest Rate Changes on Saudi REIT Returns during Various Monetary Policy Cycles: A Panel Data Analysis

Abstract

The recent proliferation of Saudi real estate investment trusts (REITs), catalyzed by serious economic reforms as part of Saudi Vision 2030, has garnered global interest in accessing the Saudi real estate market, which has emerged as a leading investment hub in the Middle East. This study focuses on gauging the sensitivity of REITs’ returns to interest rate movements using the two-index model of equity and debt market returns. The dataset is based on monthly data of individual REITs, equity market index, and short- and long-term interest rates, spanning the period 2016M12 to 2024M10, which coincides with three monetary policy cycles. In our econometric analysis, we initially estimate the two-index model for each REIT and test whether all REITs exhibit an equivalent exposure to market and interest rate risks. The test results fail to reject the cross-sectional homogeneity among Saudi REITs, leading us to continue the analysis using pooled ordinary least squares (OLS). The results show, on the one hand, that short- and long-term interest rates exert a statistically significant negative impact on REITs’ returns over the entire sample period. On the other hand, the results based on subsamples corresponding to the prevailing monetary policy regime unveil the time-dependent nature of the REIT-interest rate nexus. Interest rates seem to exert a stronger influence on REITs’ returns during the falling interest rate cycle induced by the COVID-19 pandemic. This influence, however, is substantially weakened during the ongoing monetary tightening, rendering the long-term interest rate impact statistically insignificant.