A comparison of UK equity and property duration

Abstract

This paper considers the duration of property and equity. A general formula for duration of asset classes is derived. It is shown that calculations which assume, usually implicitly, that the flowthrough of inflation to cash flow is zero, produce misleadingly high durations for property and equities. These are typically in the range 15-25 years. Simulations using the formulae show that property has some bond-like characteristics. The results indicate that, for realistic flow-through rates, equities have a higher duration than property. The flow-through rate is the most important variable in the estimation of equities. Using historical data, equity duration is estimated at 8.65 years and property's at 3.15 years. These are substantially lower than those commonly cited. If these values can be substantiated, and if higher values are used in practice, portfolio immunization strategies may need to be reconsidered.

Keywords:

• Liabilities Risk
• Immunization
• Macaulay Duration
• Equities
• Property