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Value Premium in International REITs
ERES Conference 2014
Ytzen van der Werf and Fred Huibers27 June [email protected]
Outline
• Introduction• Aim• Literature review• Methodology• Data• Results• Conclusion
Introduction
• Value investing attractive for common stocks• Value premium internationally accepted
phenomenon• Value premium = excess return from buying
cheap and selling expensive stocks• Extensively researched within common equities• Latest research into question whether it is a
reward for risk or rather a result of behavioural inaccuracy
Aim of this study
• To find out whether:
A. the value premium exists for REITs in international developed markets and
B. whether it is a reward for risk or a behavioural phenomenon
Literature review RE
• Vast number of studies into US REITs• Some find consistent value premium in US
REITs for the 90’s. Gentry et al. (2004) 11-22%. Ooi et al. (2007) 8.5%.
• One study into direct real estate (Addae et al. 2013). Assume properties with low initial yield are growth investments. Find value premium of 6% p.a. for offices and 8% for retail.
• No study so far into non-US REITs
Methodology
B
ook
to M
arke
t m
ultip
le
1.00
Highest
Lowest
0.00
Dis
coun
t to
NA
VP
rem
ium
to
NA
V
𝐵/𝑀=𝐵𝑜𝑜𝑘𝑣𝑎𝑙𝑢𝑒𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦
𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦30 June
Methodology
Boo
k to
Mar
ket
mul
tiple
1.00
Highest
Lowest0.00
Dis
coun
t to
NA
VP
rem
ium
to
NA
VQ1
Q5
Q2
Q3
Q4
30 June
Methodology
1.00
Highest
Lowest
Dis
coun
t to
NA
VP
rem
ium
to
NA
VQ1
Q5
Value REITs
Growth REITs
annual portfolio return1 July – 30 June
30 June
annual portfolio return1 July – 30 June
Data
• International Developed REITs with viewpoint of European Investor (returns in Euro)
• 23 countries with a total of 1,152 REITs• Use minimum daily trading volume of 0.5 m EUR
to ensure liquidity and positive B/M
050
100150200250300350400450500
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
REITS with positive BM and min volume
number of REITs
ResultsCharacteristics (Q1 = Value REITs)
*** significant at 1% level
Cumulative Total Returns (1,2,3 year holding)
** significant at 5% level; *** significant at 1% level
TR1 is the average yearly return of holding a value (growth) portfolio for 1 year and then rebalance the portfolio with (possible) new REITs with high (low) book to market multiples. TR02/03 cumulative total return of 2/3 years after portfolio formation
Q1 Q2 Q3 Q4 Q5 Diff. Q1-Q5
B/M 2.23 1.06 .84 .65 .36 1.86***
MV (m EUR) 445 598 749 1,079 1,543 1,098***
Q1 Q2 Q3 Q4 Q5 Diff. Q1-Q5
TR1 .218 .145 .130 .100 .115 .103 **
TR02 .439 .276 .276 .236 .266 .173 **
TR03 .712 .464 .435 .378 .422 .290***
Explanation (I)Risk based school of thought (Fama and French)• Higher return is a reward for higher risk• Test whether volatility of value REITs is higher
or whether beta within CAPM framework is higher for value stocks
* significant at 10% level
** significant at 5% level
*** significant at 1% level
Panel A: Risk measured by Standard deviation and Sharpe and Treynor ratioQ1 Q2 Q3 Q4 Q5
St. deviation .259 .209 .204 .190 .220Sharpe ratio .705 .587 .554 .440 .446Treynor ratio .378 .217 .205 .152 .133
Panel B: Market Risk (Beta) CAPM: Ri-Rf = ai + bi*(Rm-Rf ) + errai .163 ** .088 * .076 * .047 .052bi .499 .536 ** .495 ** .472 ** .649 ***
Explanation (II)Behavioural school of thought (Lakonishok)• Higher return in value REITs is a result of naive
extrapolation of results from the past to the future
• Test whether growth REITs indeed show higher past performance and whether this changes after portfolio formation and vice versa
• Performance measured as Total Return
Explanation (III)
Pre and post-formation total return performance
** significant at 5% level; *** significant at 1% level
Q1 Q2 Q3 Q4 Q5 Diff Q1-Q5 sig.level
Panel A: Pre-formation Total ReturnsTR -3 .116 .161 .193 .187 .198 -.083TR -2 .090 .164 .172 .161 .204 -.114 **TR -1 .082 .148 .167 .161 .219 -.137 ***
Panel B: Post-formation ReturnsTR 1 .218 .145 .131 .101 .115 .103 **TR 2 .165 .132 .120 .120 .122 .043
TR 3 .176 .140 .135 .134 .133 .043TR 4 .159 .121 .135 .147 .148 .010TR 5 .118 .124 .115 .114 .174 -.057
Conclusion• International developed REITs exhibit a significant
value premium of 10.3% (1993-2013) compared to a 8.3% premium Ooi et al. (2007) found in US REITs (1993-2002)
• Value premium is not a reward for additional risk (nor volatility or CAPM model)
• Value premium seems to be a result of naive extrapolation of past performance
Questions?
Thank you for your attention
Average B/M
Average book value of Equity versus market value of Equity by Quintile (Q1=Value, Q5 = Growth)
-
1.00
2.00
3.00
4.00
5.00
6.00
7.00
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
Book
to M
arke
t
Average Book to Market
Q1
Q2
Q3
Q4
Q5
Market Cap
Average Market Cap by Quintile
-
500.00
1,000.00
1,500.00
2,000.00
2,500.00
3,000.00
3,500.00
4,000.00
4,500.00
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
mar
ket c
ap (x
mln
eur
)
Average Market Cap
Q1
Q2
Q3
Q4
Q5
suggestions
Transaction costs
Net Asset Value vs Book Value of Equity
Stipulate contribution to the Literature
Keep it easy (step by step)
Controlled for difference in size?