LIQUIDITY PREMIUMS IN THE EUROPEAN LISTED REAL ESTATE SECTOR 2002 -2012 AN ANALYSIS OF SIZE AND IMPORTANCE UNDER DYNAMIC MARKET CONDITIONS ARES San Diego 2014 Alex Moss, Consilia Capital Nicole Lux , Deutsche Postbank alex.moss@consiliacapital.com nicole.lux@deutschepostbank.co.uk
CONTENTS • Background • Purpose of the Study • Methodology • Results • Summary and Conclusions Consilia Capital 2014 www.consiliacapital.com
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 investing in illiquid alternative assets such as real estate to improve longer term incremental returns. Recent evidence* however suggests that the sensitivity of stock returns to liquidity • and liquidity premia have declined significantly over the last four decades. The importance of liquidity moves over time **, and over the last 5 years higher • levels of liquidity have become more highly prized. Reflecting 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 allocation , Xiong, Sullivan and Wang 2012, Consilia Capital 2014 www.consiliacapital.com
BACKGROUND - DOES SIZE & LIQUIDITY MATTER IN VALUATION ? Global income-oriented property 30% Storage 20% Premium (discount) to NAV Apartments 1 0% Shopping 0% Ctr. Suburban Office Reg. Mall CBD Office -1 0% Industrial -20% Bubble size = relative market capitalization Source: Consilia Capital Small black circle = market cap weighted average -30% 1 % 2% 3% 4% 5% 6% 7% 8% 9% Distribution yield Consilia Capital 2014 www.consiliacapital.com
BACKGROUND - FACTORS AFFECTING RETURNS AND VALUATIONS • Concept of market dimensionality and importance of liquidity as a factor Consilia Capital 2014 www.consiliacapital.com
PURPOSE OF THE STUDY In this study we are interested in discovering : The most relevant way of measuring liquidity for European listed real estate 1) 2) Whether listed real estate displays similar liquidity trends to the rest of the equity market 3) If we can quantify a liquidity premium in valuations, rather than returns. 4) Implications for capital raising Consilia Capital 2014 www.consiliacapital.com
CAVEATS AND EXPECTATIONS • The sample size is small, as indeed is the European listed real estate sector relative 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 practice this is not the case. • In the current environment we would expect the most liquid stocks to have superior valuations. • However, the most highly regarded (valued) stocks may not be the largest, and may still benefit from an “illiquidity” or scarcity premium. • The valuation 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 portfolios, and can raise further equity capital Consilia Capital 2014 www.consiliacapital.com
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 categorisation on ranking by daily value traded (i.e. a measure of investor liquidity) rather than gross market capitalisation. 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 Consilia Capital 2014 www.consiliacapital.com
METHODOLOGY Measuring Liquidity • Bid-ask spread • Turnover ratio Relative Liquidity • Hui-Heubel Liquidity Ratio Valuations • Discount to NAV (smoothed on a monthly basis) • Monthly data used Consilia Capital 2014 www.consiliacapital.com
METHODOLOGY - BID ASK SPREAD ( P P ) • Definition ask bid Spread 2 P P / ask bid • The bid-ask spread arises from three main components:order processing, adverse information and inventory costs. A high level of competition between intermediaries allows for a reduction of the • order processing component and improves the liquidity condition of the market. • The informational component of the bid-ask spread sheds light on the degree of efficiency due to the presence of hidden information or insider trading Consilia Capital 2014 www.consiliacapital.com
METHODOLOGY - TURNOVER RATIO N V • Definition t N total • 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 Consilia Capital 2014 www.consiliacapital.com
METHODOLOGY - HUI HEUBEL LIQUIDITY RATIO P P / P max min min HH • Definition V / S P • The Hui Heubel liquidity ratio is a volume based measure, relating 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 Consilia Capital 2014 www.consiliacapital.com
METHODOLOGY – VALUATION – DISCOUNT/PREMIUM TO NAV • NAV was chosen as a metric rather than dividend yield, as payout ratios vary between REITs and PropCos, and FFO multiples 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 Consilia Capital 2014 www.consiliacapital.com
RESULTS - BID ASK SPREAD RESULTS UK • Findings are consistent with other studies : • Spreads are inversely correlated with • Spreads have reduced over time market capitalisation 2007-2012 2002-2006 1.6% 7,000.0 1.8% 7,000.0 1.6% 1.4% 6,000.0 6,000.0 1.4% 1.2% 5,000.0 5,000.0 1.2% 1.0% 4,000.0 1.0% 4,000.0 0.8% 0.8% 3,000.0 3,000.0 0.6% 0.6% 2,000.0 2,000.0 0.4% 0.4% 1,000.0 0.2% 1,000.0 0.2% 0.0% - 0.0% - Average market cap Average market cap Source: Bloomberg, Authors Consilia Capital 2014 www.consiliacapital.com
RESULTS - BID ASK SPREADS EUROPE ….but have shown a similar • In Europe , spreads have been higher downward trend than in the UK….. 2007-2012 2002-2006 12.0% 5,000.0 2.0% 14,000.0 4,500.0 1.8% 12,000.0 10.0% 4,000.0 1.6% 10,000.0 3,500.0 1.4% 8.0% 1.2% 3,000.0 8,000.0 1.0% 6.0% 2,500.0 6,000.0 0.8% 2,000.0 4.0% 0.6% 1,500.0 4,000.0 0.4% 1,000.0 2.0% 2,000.0 0.2% 500.0 0.0% - 0.0% - Average market cap Average market cap Source: Bloomberg, Authors Consilia Capital 2014 www.consiliacapital.com
RESULTS - TURNOVER RATIO UK • In the UK there is a clear correlation between the size of the company as measured by market capitalisation, and the percentage of shares traded relative to the amount outstanding 1.8 1.8 1.6 1.6 1.4 1.4 1.2 1.2 1 1 0.8 0.8 0.6 0.6 0.4 0.4 0.2 0.2 0 0 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) Source: Bloomberg, Authors Consilia Capital 2014 www.consiliacapital.com
RESULTS - TURNOVER RATIO EUROPE • In Europe the picture is less concrete, and absolute levels of turnover are lower, but there is still a clear correlation between gross market capitalisation and relative liquidity. 1.4 1.4 1.2 1.2 1 1 0.8 0.8 0.6 0.6 0.4 0.4 0.2 0.2 0 0 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) Source: Bloomberg, Authors Consilia Capital 2014 www.consiliacapital.com
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