The impact of liquidity on REIT valuations - European evidence 2002-12
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Transcript of The impact of liquidity on REIT valuations - European evidence 2002-12
THE IMPACT OF L IQUIDITY ON THE VALUATION OF EUROPEAN L ISTED REAL ESTATE SECURITIES
[email protected] [email protected]
Alex Moss, Consilia Capital Nicole Lux , Deutsche Bank
ARES San Diego 2014
CONTENTS
• Background
• Purpose of the Study
• Methodology
• Results
• Summary and Conclusions
Consilia Capital 2014 www.consiliacapital.com
2
BACKGROUND – KEY POINTS
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• The Fama-‐French three factor model (1993) highlighted the concept that less liquid stocks (should and do) yield higher returns.
• The endowment model, which was pioneered by David Swenson at Yale emphasised invesSng in illiquid alternaSve assets such as real estate to improve longer term incremental returns.
• Recent evidence* however suggests that the sensiSvity of stock returns to liquidity and liquidity premia have declined significantly over the last four decades.
• The importance of liquidity moves over Sme **, and over the last 5 years higher levels of liquidity have become more highly prized.
• ReflecSng this there has been an increase in the use of sector indices and strategies based purely on liquidity.
• The diminishing liquidity premium, Ben-‐Raphael, Kadan, and Wohl 2010, **Liquidity driven dynamic asset allocaSon , Xiong, Sullivan and Wang 2012,
3
BACKGROUND -‐ DOES SIZE & LIQUIDITY MATTER IN VALUATION ?
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Global income-oriented property
-‐30%
-‐20%
-‐10%
0%
10%
20%
30%
1% 2% 3% 4% 5% 6% 7% 8% 9%
Distribution yield
Prem
ium
(dis
coun
t) to
NA
V
Apartments
Storage
CBD Office
Industrial
B ubble s ize = relative market c apitalizatio nS mall blac k c irc le = market c ap weighted average
Suburban Office
Shopping Ctr.
Reg. Mall
Source: Consilia Capital
4
BACKGROUND -‐ FACTORS AFFECTING RETURNS AND VALUATIONS
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• Concept of market dimensionality and importance of liquidity as a factor
5
PURPOSE OF THE STUDY
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In this study we are interested in discovering : 1) The most relevant way of measuring liquidity for European listed real estate 2) Whether listed real estate displays similar liquidity trends to the rest of the equity market 3) If we can quanSfy a liquidity premium in valuaSons, rather than returns. 4) ImplicaSons for capital raising
6
CAVEATS AND EXPECTATIONS
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• The sample size is small, as indeed is the European listed real estate sector relaSve to both the global listed real estate market, declining from c. 25% to c. 12%, and the UK and European equity markets. Therefore results can be distorted by stock specific factors.
• Ideally the underlying assets of the companies would be homogenous so that the liquidity premium could be isolated. In pracSce this is not the case.
• In the current environment we would expect the most liquid stocks to have superior valuaSons.
• However, the most highly regarded (valued) stocks may not be the largest, and may sSll benefit from an “illiquidity” or scarcity premium.
• The valuaSon premium for liquidity may not be linear or “graded”, but indeed binary , i.e. only companies with a minimum level of liquidity are included in pordolios, and can raise further equity capital
7
THE SAMPLE
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• We have taken data from 2002 to 2012 for companies from the UK and Europe and divided them into large , medium and small as follows:
• We based the categorisaSon on ranking by daily value traded (i.e. a measure of investor liquidity) rather than gross market capitalisaSon.
UK Europe
Large Land Securities Group PLC Unibail-Rodamco SEBritish Land Co PLC Corio NVHammerson Plc KlepierreSegro Wereldhave NV
MidDerwent London Kungsleden ABGreat Portland Estates Plc Beni Stabili SpAShaftesbury Plc Sponda OYJCapital & Counties Properties PLC Vastned Retail NV
SmallPrimary Health Properties PLC Vastned Offices/IndustrialDevelopment Securities PLC Societe de la Tour EiffelST Modwen Properties Plc DIC Asset AGHelical Bar Plc Fastighets AB Balder
8
METHODOLOGY
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Measuring Liquidity • Bid-‐ask spread • Turnover raSo
RelaUve Liquidity • Hui-‐Heubel Liquidity RaSo
ValuaUons • Discount to NAV (smoothed on a monthly basis)
• Monthly data used
9
METHODOLOGY -‐ BID ASK SPREAD
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• DefiniSon
• The bid-‐ask spread arises from three main components:order processing, adverse informaSon and inventory costs.
• A high level of compeSSon between intermediaries allows for a reducSon of the order processing component and improves the liquidity condiSon of the market.
• The informaSonal component of the bid-‐ask spread sheds light on the degree of
efficiency due to the presence of hidden informaSon or insider trading
( ) 2/)(
bidask
bidask
PPPPSpread
+
−=
10
METHODOLOGY -‐ TURNOVER RATIO
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• DefiniSon
• It represents the number of shares traded vs. the total number of shares outstanding
• As a volume based measure it is defined as the volume traded vs. the total volume outstanding
• We prefer this to the daily value traded measure
total
t
NNV =
11
METHODOLOGY -‐ HUI HEUBEL LIQUIDITY RATIO
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• DefiniSon
• The Hui Heubel liquidity raSo is a volume based measure, relaSng average volumes over a defined period (i.e. 1 day, month, etc.) to observed price ranges
• Pmax is the highest daily price over a 1month-‐day period, Pmin is the lowest daily price over the same horizon, V is the total volume of assets traded over a 1month-‐day period, S is the total number of assets outstanding and P denotes the average closing price
( )[ ]( )( )PSV
PPPHH ∗−
=/
/ minminmax
12
METHODOLOGY – VALUATION – DISCOUNT/PREMIUM TO NAV
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• NAV was chosen as a metric rather than dividend yield, as payout raSos vary between REITs and PropCos, and FFO mulSples are not commonly used in Europe.
• For NAV we have taken the published “EPRA” NAV or equivalent, and smoothed the
figures between the published updates (typically 6 months). • Price and NAV data are calculated on a monthly basis
13
RESULTS -‐ BID ASK SPREAD RESULTS UK
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• Findings are consistent with other studies :
• Spreads are inversely correlated with market capitalisaSon
2002-‐2006
• Spreads have reduced over Sme 2007-‐2012
-‐
1,000.0
2,000.0
3,000.0
4,000.0
5,000.0
6,000.0
7,000.0
0.0%0.2%0.4%0.6%0.8%1.0%1.2%1.4%1.6%1.8%
Average market cap
-‐
1,000.0
2,000.0
3,000.0
4,000.0
5,000.0
6,000.0
7,000.0
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
Average market cap
Source: Bloomberg, Authors
14
RESULTS -‐ BID ASK SPREADS EUROPE
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• In Europe , spreads have been higher than in the UK…..
2002-‐2006 2007-‐2012
-‐ 500.0 1,000.0 1,500.0 2,000.0 2,500.0 3,000.0 3,500.0 4,000.0 4,500.0 5,000.0
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Average market cap
-‐ 2,000.0 4,000.0 6,000.0 8,000.0 10,000.0 12,000.0 14,000.0
0.0%0.2%0.4%0.6%0.8%1.0%1.2%1.4%1.6%1.8%2.0%
Average market cap
….but have shown a similar downward trend
Source: Bloomberg, Authors
15
RESULTS -‐ TURNOVER RATIO UK
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0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
Jan-‐02
May-‐02
Sep-‐02
Jan-‐03
May-‐03
Sep-‐03
Jan-‐04
May-‐04
Sep-‐04
Jan-‐05
May-‐05
Sep-‐05
Jan-‐06
May-‐06
Sep-‐06
Jan-‐07
May-‐07
Sep-‐07
Jan-‐08
May-‐08
Sep-‐08
Jan-‐09
May-‐09
Sep-‐09
Jan-‐10
May-‐10
Sep-‐10
Jan-‐11
May-‐11
Sep-‐11
Jan-‐12
May-‐12
Sep-‐12
Shares traded (Large cap) Shares traded (medium cap) Shares traded (small cap)
• In the UK there is a clear correlaSon between the size of the company as measured by market capitalisaSon, and the percentage of shares traded relaSve to the amount outstanding
Source: Bloomberg, Authors
16
RESULTS -‐ TURNOVER RATIO EUROPE
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0
0.2
0.4
0.6
0.8
1
1.2
1.4
0
0.2
0.4
0.6
0.8
1
1.2
1.4
Jan-‐02
May-‐02
Sep-‐02
Jan-‐03
May-‐03
Sep-‐03
Jan-‐04
May-‐04
Sep-‐04
Jan-‐05
May-‐05
Sep-‐05
Jan-‐06
May-‐06
Sep-‐06
Jan-‐07
May-‐07
Sep-‐07
Jan-‐08
May-‐08
Sep-‐08
Jan-‐09
May-‐09
Sep-‐09
Jan-‐10
May-‐10
Sep-‐10
Jan-‐11
May-‐11
Sep-‐11
Jan-‐12
May-‐12
Sep-‐12
Shares traded (medium cap) Shares traded (large cap) Shares traded (small cap)
• In Europe the picture is less concrete, and absolute levels of turnover are lower, but there is sSll a clear correlaSon between gross market capitalisaSon and relaSve liquidity.
Source: Bloomberg, Authors
17
RESULTS -‐ HH LIQUIDITY INDEX RESULTS
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0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
HH index FTSE All HH ratio FTXE 600 HH ratio EPRA
• The lower the index the higher liquidity. We show below the HH Index results for the UK equity market, the European equity market and the European listed real estate market (EPRA). Although the sector exhibited lower levels of liquidity at Smes of market stress (2008-‐09) , current levels are similar to the equity market overall.
Source: Bloomberg, Authors
18
RESULTS – UK VALUATIONS
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-‐100%
-‐80%
-‐60%
-‐40%
-‐20%
0%
20%
40%
60%
31 Ja
nuary 2
002
31 Ju
ly 20
02
31 Ja
nuary 2
003
31 Ju
ly 20
03
31 Ja
nuary 2
004
31 Ju
ly 20
04
31 Ja
nuary 2
005
31 Ju
ly 20
05
31 Ja
nuary 2
006
31 Ju
ly 20
06
31 Ja
nuary 2
007
31 Ju
ly 20
07
31 Ja
nuary 2
008
31 Ju
ly 20
08
31 Ja
nuary 2
009
31 Ju
ly 20
09
31 Ja
nuary 2
010
31 Ju
ly 20
10
31 Ja
nuary 2
011
31 Ju
ly 20
11
31 Ja
nuary 2
012
31 Ju
ly 20
12
31 Ja
nuary 2
013
Larg Cap average Medium Cap average small cap average
• We show below the discount to NAV of the stocks in our sample.
• This shows very clearly that up to 2008 smaller, and since 2010 medium sized stocks (which have a C. London bias) command a valuaSon premium.
Source: Bloomberg, EPRA, Authors
19
RESULTS – EUROPEAN VALUATIONS
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-100%-80%-60%-40%-20%
0%20%40%60%80%
31 J
anua
ry 2
002
31 J
uly
2002
31 J
anua
ry 2
003
31 J
uly
2003
31 J
anua
ry 2
004
31 J
uly
2004
31 J
anua
ry 2
005
31 J
uly
2005
31 J
anua
ry 2
006
31 J
uly
2006
31 J
anua
ry 2
007
31 J
uly
2007
31 J
anua
ry 2
008
31 J
uly
2008
31 J
anua
ry 2
009
31 J
uly
2009
31 J
anua
ry 2
010
31 J
uly
2010
31 J
anua
ry 2
011
31 J
uly
2011
31 J
anua
ry 2
012
31 J
uly
2012
31 J
anua
ry 2
013
Large cap average Medium cap average Small cap average
• In Europe, by contrast , with the excepSon of the lamer stages of the bull market in 2006 and early 2007 the larger , more liquid companies have a higher valuaSon. NB this is at least partly amributable to the impact of by the largest stock Unibail being widely regarded as the best managed.
Source: Bloomberg, EPRA , Authors
20
RESULTS – LIQUIDITY PREMIUM UK
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• In the UK it can be seen that with the excepSon of a brief period in 2008 larger cap. stocks command a lower valuaSon than medium cap. stocks. This relates to preferred asset concentraSon (C. London) and is a UK specific issue. Note the dramaSc increase in relaSve valuaSon for larger stocks compared to smaller co.'s since 2010 reflecSng increased desire for liquidity.
-‐80.00%
-‐60.00%
-‐40.00%
-‐20.00%
0.00%
20.00%
40.00%
Jan-‐02 Jan-‐03 Jan-‐04 Jan-‐05 Jan-‐06 Jan-‐07 Jan-‐08 Jan-‐09 Jan-‐10 Jan-‐11 Jan-‐12
Large cap vs med cap
Large cap vs small cap
Source: Bloomberg, EPRA, Authors
21
RESULTS LIQUIDITY PREMIUM EUROPE
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-‐60.00%
-‐40.00%
-‐20.00%
0.00%
20.00%
40.00%
60.00%
80.00%
Jan-‐02 Jan-‐03 Jan-‐04 Jan-‐05 Jan-‐06 Jan-‐07 Jan-‐08 Jan-‐09 Jan-‐10 Jan-‐11 Jan-‐12
Large cap vs med cap
Large cap vs small cap
Source: Bloomberg, EPRA, Authors
• In Europe the valuaSon premium for greater liquidity is clear. Having peaked at over 70% , it is currently just under 40%. It should be noted , however, that Unibail has a significant impact on these results.
22
SUMMARY AND CONCLUSIONS
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We believe that the quesSons posed at the outset can be answered as follows: • The most relevant way of measuring liquidity for European listed real estate A combina*on of the turnover ra*o and the Hui-‐Huebel Liquidity ra*o • Does the real estate sector display similar liquidity trends to the rest of the equity
market? Yes, using the Hui-‐Huebel ra*o as an indicator. • Can we quanSfy a liquidity premium in valuaSons, rather than returns? Yes, by using a discount to NAV methodology and grouping stocks by size/liquidity bands • Current levels of liquidity premia and the implicaSons for capital raising These vary currently from UK (15% premium large to small cap.) to Europe (40%). The liquidity valua*on premium has increased significantly since Summer 2010 reflec*ng the increasing importance of liquidity as a valua*on driver. This premium has enabled larger companies to access the equity and debt capital markets at more compe**ve (minimally dilu*ve or accre*ve) levels.
23