NAV discounts in European listed property companies - a panel regression approach

The awkward issue of high NAV discounts to share price continues to plague the management of European listed property companies as well as its shareholders. Whilst the share trades at a discount new investment decisions compete against a share buy back. From a cost of capital point of view this is an attractive option and hence share buy backs are quite frequent. The turmoil on the equity markets post-Lehman has not laid to rest old questions about the behaviour of property shares vis-‡-vis the equity market. Recent research (Sch‰tz A. and Sebastian S. 2009) looking at UK and US real estate stock indices has found medium to long-term performance of the indices to be significantly correlated to the underlying property market. This however doesnít necessarily apply to companies (and countries) in a less strong position in the equity markets. As a result management will find the NAV discount difficult to reduce without considering the variables mentioned below. This research builds on previous work by the authors as well as Bond and Shilling (2004), Brounen and ter Laak (2004) and others. Using a panel regression approach emphasis is placed on explanatory variables strengthening the company in the equity markets. These include the number of analysts covering the company, trading liquidity of the share, EPRA index membership, market capitalisation, level of free-float and market capitalisation of the exchange the share is listed on. All of these are expected to have an inverse relationship to NAV discounts. There is less emphasis on property specific variables, although geographical and sector focus is considered. Focus is also expected to have an inverse relationship with NAV discounts. Clearly other variables also have explanatory power when considering NAV discounts, but this research sets out to show that those listed companies best equipped to deal with the equity market as determined by the variables above will have the lowest NAV discounts.