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


•  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 ?


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


•  Concept of market dimensionality and importance of liquidity as a factor

5

PURPOSE OF THE STUDY


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


•  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


•  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


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


•  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


•  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


•  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


•  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


•  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


•  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


15

RESULTS -‐ TURNOVER RATIO UK


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


16

RESULTS -‐ TURNOVER RATIO EUROPE


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.


17

RESULTS -‐ HH LIQUIDITY INDEX RESULTS


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.


18

RESULTS – UK VALUATIONS


-‐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


-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


•  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


21

RESULTS LIQUIDITY PREMIUM EUROPE


-‐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


•  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


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

Economy & Finance

The impact of liquidity on REIT valuations - European evidence 2002-12