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

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