MARKET CONDITIONS ARES San Diego 2014 Alex Moss, Consilia Capital - - PowerPoint PPT Presentation

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MARKET CONDITIONS ARES San Diego 2014 Alex Moss, Consilia Capital - - PowerPoint PPT Presentation

May 30, 2023 233 likes •481 views

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

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SLIDE 1

LIQUIDITY PREMIUMS IN THE EUROPEAN LISTED REAL ESTATE SECTOR 2002 -2012 AN ANALYSIS OF SIZE AND IMPORTANCE UNDER DYNAMIC MARKET CONDITIONS

alex.moss@consiliacapital.com nicole.lux@deutschepostbank.co.uk

Alex Moss, Consilia Capital Nicole Lux , Deutsche Postbank

ARES San Diego 2014

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SLIDE 2

CONTENTS

  • Background
  • Purpose of the Study
  • Methodology
  • Results
  • Summary and Conclusions

Consilia Capital 2014 www.consiliacapital.com

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SLIDE 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 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,

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SLIDE 4

BACKGROUND - DOES SIZE & LIQUIDITY MATTER IN VALUATION ?

Consilia Capital 2014 www.consiliacapital.com

Global income-oriented property

  • 30%
  • 20%
  • 1

0% 0% 1 0% 20% 30% 1 % 2% 3% 4% 5% 6% 7% 8% 9%

Distribution yield Premium (discount) to NAV

Apartments Storage CBD Office Industrial

Bubble size = relative market capitalization Small black circle = market cap weighted average

Suburban Office Shopping Ctr.

  • Reg. Mall

Source: Consilia Capital

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SLIDE 5

BACKGROUND - FACTORS AFFECTING RETURNS AND VALUATIONS

Consilia Capital 2014 www.consiliacapital.com

  • Concept of market dimensionality and importance of liquidity as a factor
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SLIDE 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 quantify a liquidity premium in valuations, rather than returns. 4) Implications for capital raising

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SLIDE 7

CAVEATS AND EXPECTATIONS

Consilia Capital 2014 www.consiliacapital.com

  • 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

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SLIDE 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 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

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SLIDE 9

METHODOLOGY

Consilia Capital 2014 www.consiliacapital.com

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
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SLIDE 10

METHODOLOGY - BID ASK SPREAD

Consilia Capital 2014 www.consiliacapital.com

  • Definition
  • 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
  • rder 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

  2

/ ) (

bid ask bid ask

P P P P Spread   

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SLIDE 11

METHODOLOGY - TURNOVER RATIO

Consilia Capital 2014 www.consiliacapital.com

  • Definition
  • 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
  • utstanding
  • We prefer this to the daily value traded measure

total t

N N V 

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SLIDE 12

METHODOLOGY - HUI HEUBEL LIQUIDITY RATIO

Consilia Capital 2014 www.consiliacapital.com

  • Definition
  • The Hui Heubel liquidity ratio is a volume based measure, relating average volumes
  • ver 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

   

   

P S V P P P HH      / /

min min max

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METHODOLOGY – VALUATION – DISCOUNT/PREMIUM TO NAV

Consilia Capital 2014 www.consiliacapital.com

  • 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
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SLIDE 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 capitalisation 2002-2006

  • Spreads have reduced over time

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

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SLIDE 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

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RESULTS - TURNOVER RATIO UK

Consilia Capital 2014 www.consiliacapital.com

0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 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 correlation between the size of the company as

measured by market capitalisation, and the percentage of shares traded relative to the amount outstanding

Source: Bloomberg, Authors

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RESULTS - TURNOVER RATIO EUROPE

Consilia Capital 2014 www.consiliacapital.com

0.2 0.4 0.6 0.8 1 1.2 1.4 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 still a clear correlation between gross market capitalisation and relative liquidity.

Source: Bloomberg, Authors

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SLIDE 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 times of market stress (2008-09) , current levels are similar to the equity market overall.

Source: Bloomberg, Authors

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SLIDE 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 valuation premium.

Source: Bloomberg, EPRA, Authors

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SLIDE 20

RESULTS – EUROPEAN VALUATIONS

Consilia Capital 2014 www.consiliacapital.com

  • 100%
  • 80%
  • 60%
  • 40%
  • 20%

0% 20% 40% 60% 80% 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

Large cap average Medium cap average Small cap average

  • In Europe, by contrast , with the exception of the latter stages of the bull market in 2006

and early 2007 the larger , more liquid companies have a higher valuation. NB this is at least partly attributable to the impact of by the largest stock Unibail being widely regarded as the best managed.

Source: Bloomberg, EPRA , Authors

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RESULTS – LIQUIDITY PREMIUM UK

Consilia Capital 2014 www.consiliacapital.com

  • In the UK it can be seen that with the exception of a brief period in 2008 larger cap.

stocks command a lower valuation than medium cap. stocks. This relates to preferred asset concentration (C. London) and is a UK specific issue. Note the dramatic increase in relative valuation for larger stocks compared to smaller co.'s since 2010 reflecting 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

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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 valuation 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.

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SLIDE 23

SUMMARY AND CONCLUSIONS

Consilia Capital 2014 www.consiliacapital.com

We believe that the questions posed at the outset can be answered as follows:

  • The most relevant way of measuring liquidity for European listed real estate

A combination of the turnover ratio and the Hui-Huebel Liquidity ratio

  • Does the real estate sector display similar liquidity trends to the rest of the equity

market? Yes, using the Hui-Huebel ratio as an indicator.

  • Can we quantify a liquidity premium in valuations, 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 implications for capital raising

These vary currently from UK (15% premium large to small cap.) to Europe (40%). The liquidity valuation premium has increased significantly since Summer 2010 reflecting the increasing importance of liquidity as a valuation driver. This premium has enabled larger companies to access the equity and debt capital markets at more competitive (minimally dilutive or accretive) levels.