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

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The impact of liquidity on the valuation of European real estate securities 2002-2012. Presentation at the ARES conference San Diego April 2014

The impact of liquidity on the valuation of European real estate securities 2002-2012. Presentation at the ARES conference San Diego April 2014

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  • 1. THE  IMPACT  OF  LIQUIDITY  ON  THE  VALUATION  OF   EUROPEAN  LISTED  REAL  ESTATE  SECURITIES                                 alex.moss@consiliacapital.com   nicole.lux@db.com           Alex  Moss,  Consilia  Capital   Nicole  Lux  ,  Deutsche  Bank           ARES    San  Diego  2014    
  • 2. CONTENTS     •  Background     •  Purpose  of  the  Study   •  Methodology   •  Results   •  Summary  and  Conclusions   Consilia  Capital  2014    www.consiliacapital.com   2  
  • 3. BACKGROUND  –  KEY  POINTS     Consilia  Capital  2014    www.consiliacapital.com   •  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  
  • 4. BACKGROUND  -­‐  DOES  SIZE  &  LIQUIDITY  MATTER  IN  VALUATION  ?   Consilia  Capital  2014    www.consiliacapital.com       Global income-oriented property -­‐30% -­‐20% -­‐10% 0% 10% 20% 30% 1% 2% 3% 4% 5% 6% 7% 8% 9% Distribution yield Premium(discount)toNAV Apartments Storage CBD Office Industrial B ubble  s ize  =  relative  market  capitalizatio n S mall  black  circle  =  market  cap  weighted  average Suburban Office Shopping Ctr. Reg. Mall Source:  Consilia  Capital     4  
  • 5. BACKGROUND  -­‐  FACTORS  AFFECTING  RETURNS  AND  VALUATIONS   Consilia  Capital  2014    www.consiliacapital.com   •  Concept  of  market  dimensionality  and  importance  of  liquidity  as  a  factor     5  
  • 6. PURPOSE  OF  THE  STUDY   Consilia  Capital  2014    www.consiliacapital.com   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  
  • 7. CAVEATS  AND  EXPECTATIONS   Consilia  Capital  2014    www.consiliacapital.com   •  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  
  • 8. THE  SAMPLE   Consilia  Capital  2014    www.consiliacapital.com   •  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 SE British Land Co PLC Corio NV Hammerson Plc Klepierre Segro Wereldhave NV Mid Derwent London Kungsleden AB Great Portland Estates Plc Beni Stabili SpA Shaftesbury Plc Sponda OYJ Capital & Counties Properties PLC Vastned Retail NV Small Primary Health Properties PLC Vastned Offices/Industrial Development Securities PLC Societe de la Tour Eiffel ST Modwen Properties Plc DIC Asset AG Helical Bar Plc Fastighets AB Balder 8  
  • 9.  METHODOLOGY     Consilia  Capital  2014    www.consiliacapital.com     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  
  • 10. METHODOLOGY  -­‐  BID  ASK  SPREAD   Consilia  Capital  2014    www.consiliacapital.com   •  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 PP PP Spread + − = 10  
  • 11. METHODOLOGY  -­‐  TURNOVER  RATIO   Consilia  Capital  2014    www.consiliacapital.com   •  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 N N V = 11  
  • 12. METHODOLOGY  -­‐  HUI  HEUBEL  LIQUIDITY  RATIO   Consilia  Capital  2014    www.consiliacapital.com   •  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 PPP HH ∗ − = / / minminmax 12  
  • 13. METHODOLOGY  –  VALUATION  –  DISCOUNT/PREMIUM    TO  NAV   Consilia  Capital  2014    www.consiliacapital.com   •  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  
  • 14. RESULTS  -­‐  BID  ASK  SPREAD  RESULTS          UK     Consilia  Capital  2014    www.consiliacapital.com   •  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  
  • 15. RESULTS  -­‐  BID  ASK  SPREADS    EUROPE   Consilia  Capital  2014    www.consiliacapital.com   •  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  
  • 16. RESULTS  -­‐  TURNOVER  RATIO    UK     Consilia  Capital  2014    www.consiliacapital.com         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  
  • 17. RESULTS  -­‐  TURNOVER  RATIO  EUROPE   Consilia  Capital  2014    www.consiliacapital.com   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  
  • 18. RESULTS  -­‐  HH  LIQUIDITY  INDEX  RESULTS   Consilia  Capital  2014    www.consiliacapital.com   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  
  • 19. RESULTS      –  UK  VALUATIONS     Consilia  Capital  2014    www.consiliacapital.com   -­‐100% -­‐80% -­‐60% -­‐40% -­‐20% 0% 20% 40% 60% 31  January  2002 31  July  2002 31  January  2003 31  July  2003 31  January  2004 31  July  2004 31  January  2005 31  July  2005 31  January  2006 31  July  2006 31  January  2007 31  July  2007 31  January  2008 31  July  2008 31  January  2009 31  July  2009 31  January  2010 31  July  2010 31  January  2011 31  July  2011 31  January  2012 31  July  2012 31  January  2013 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  
  • 20. RESULTS  –  EUROPEAN  VALUATIONS     Consilia  Capital  2014    www.consiliacapital.com   -100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 31January2002 31July2002 31January2003 31July2003 31January2004 31July2004 31January2005 31July2005 31January2006 31July2006 31January2007 31July2007 31January2008 31July2008 31January2009 31July2009 31January2010 31July2010 31January2011 31July2011 31January2012 31July2012 31January2013 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  
  • 21. RESULTS  –  LIQUIDITY  PREMIUM    UK     Consilia  Capital  2014    www.consiliacapital.com   •  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  
  • 22. RESULTS    LIQUIDITY  PREMIUM    EUROPE   Consilia  Capital  2014    www.consiliacapital.com   -­‐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  
  • 23. SUMMARY  AND  CONCLUSIONS   Consilia  Capital  2014    www.consiliacapital.com   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