Leverage and NAV discount: evidence from Italian real estate investment funds

Morri, Giacomo; Benedetto, Paolo

doi:10.1108/17539260910959545

Cited by 21 publications

(25 citation statements)

References 27 publications

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“…Barclay et al (1993) find that closed-end funds with large blockholders display larger discounts. In contrast, Morri and Benedetto (2009) find that Italian closed-end real estate funds with large blockholders tend to exhibit smaller discounts to NAV. For German open-end real estate funds, Fecht and Wedow (2014) find that a lower share of institutional investors significantly lower capital outflows.…”

Section: Research Design and Definition Of Variablescontrasting

confidence: 63%

The Discount to NAV of Distressed Open-End Real Estate Funds

Schnejdar

Heinrich

Woltering

et al. 2019

J Real Estate Finan Econ

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This paper examines the discount to NAV in the context of distressed German open-end real estate funds. This is a unique setting to study NAV discounts because distressed real estate funds are forced to sell off their property portfolios and pay out the proceeds to investors. In contrast, the discount to NAV of closed-end funds or REITs can theoretically persist forever. This enables us to study how investors price the risks associated with the forced liquidation of direct-property portfolios. Our hand-collected dataset covers the complete crisis and post-crisis period from October 2008 through June 2016. Using panel regression methods, we find that the discount to NAV is driven by fundamental risk because it is positively correlated with a funds leverage ratio and it decreases with the share of liquid assets. We also provide evidence that the discount is related to conflicts of interest between investors and fund management. Besides these fund-specific factors, we find that NAV discounts are driven by spillover effects from the announcement of other funds' liquidations, as well as by investor sentiment, which is proxied by the aggregate level of capital flows into the industry and by the degree of macroeconomic uncertainty.

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Section: Research Design and Definition Of Variablescontrasting

confidence: 63%

The Discount to NAV of Distressed Open-End Real Estate Funds

Schnejdar

Heinrich

Woltering

et al. 2019

J Real Estate Finan Econ

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“…Barclay et al (1993) conclude that closed-end funds with a large share of blockholder display a larger discount. In contrast, Morri et al (2009) find an adverse effect of the share of institutional investors to a NAV Spread for Italian closed-end real estate funds. Brounen, et al (2010) state that the share of institutional investors should diminish the effect of sentiment for NAV Premia in UK REITs.…”

Section: Fund Specificsmentioning

confidence: 57%

The Discount to NAV of distressed German open-ended real estate funds

Schnejdar¹,

Heinrich²,

Woltering³

et al. 2017

24th Annual European Real Estate Society Conference

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The German open-ended real estate fund industry was strongly hit by massive outflows in the course of the global financial crisis. In total, 18 public and institutional real estate funds had to stop the redemption of shares and were ultimately forced to liquidate their portfolios. Investors of these funds either have to await the stepwise liquidation of the funds' assets, which can take up to several years, or they can opt to sell their shares on the secondary market, often at a substantial discount to the Net Asset Value (NAV Spread). This paper attempts to explain the NAV Spread of distressed German public open-ended real estate funds. The unique monthly dataset contains fund specifics and macroeconomic indicators for the entire relevant period. Fundamentals like the leverage ratio and the liquidity ratio as well as industry-wide spillover effects from fund closures affect the NAV Spread. Moreover, we detect a considerably influence of macroeconomic uncertainty explaining the discount to NAV.

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“…Following a rational approach to NAV premiums, we explore the company-specific factors such as liquidity, financial leverage, firm size, historical return, stock price volatility and portfolio diversification behind the A-REIT NAV premiums/discounts. Similar studies have been conducted to explain NAV discounts in the US and European REIT markets by several scholars (see Adams and Venmore-Rowland, 1990; Barkham and Ward, 1999;Clayton and MacKinnon, 2000;Seguin, 2000, 2003;Bond and Shilling, 2004;Brounen and Ter Laak, 2005;Morri and Benedetto, 2009;Patel et al, 2009). We also carry out sub-sample analysis to explore the determinants of NAV premiums/discounts in the GFC period, after-GFC rapid recovery period, and end-of-recovery period in A-REIT market separately.…”

Section: Introductionmentioning

confidence: 78%

“…The traditional approach explains NAV discounts under the assumption of market efficiency, such that if stock price reflects all current publicly available information, any difference between the stock price and NAV is explained by company-specific factors, including firm size, liquidity, financial leverage, taxation, ownership structure, portfolio diversification, returns, company risk, transaction and search costs and the role of external directors (see Adams and Venmore-Rowland, 1990;Barkham and Ward, 1999;Clayton and MacKinnon, 2000;Seguin, 2000, 2003;Bond and Shilling, 2004;Brounen and Ter Laak, 2005;Morri and Benedetto, 2009;Patel et al, 2009 among others). The traditional approach has been studied more than the noise trader approach; however, as the related research has been conducted in different geographical markets and in different times, it is difficult to determine a generally accepted conclusion, as most of the results differ in time and geography.…”

Section: Jpif 381mentioning

confidence: 99%

Explaining the premium to NAV in publicly traded Australian REITs, 2008–2018

Erol¹,

Tyvimaa²

2019

JPIF

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Purpose The purpose of this paper is to explore the levels and determinants of net asset value (NAV) premiums/discounts for publicly traded Australian Real Estate Investment Trust (A-REIT) market during the last decade. A-REITs were severely affected by the global financial crisis as S&P/ASX 200 A-REIT index-listed property stocks experienced 47 per cent discount to NAV, on average, in 2008–2009 crisis. Since 2013, A-REIT sector has exhibited a strong recovery from the financial crisis and traded at high premiums to date. Understanding the relationship between pricing in the public and private real estate markets has taken on great importance as A-REITs continue to trade at significant premium to NAV unlike their counterparts in the USA and Europe. Design/methodology/approach This paper follows a rational approach to explain variations in NAV premiums and explores the company-specific factors such as liquidity, financial leverage, size, stock price volatility and portfolio diversification behind the A-REIT NAV premiums/discounts. The study specifies and estimates a model of cross-sectional and time variation in premiums/discounts to NAV using semi-annual data for a sample of 40 A-REITs over the 2008–2018 period. Findings The results reveal that A-REIT premiums to NAV can be explained not only by the liquidity benefit of listed property stocks but also positive financial leverage effect. During the past decade, A-REITs have followed an aggressive approach in financing their growth by using borrowed funds to purchase assets as the income from the property offsets the cost of borrowing and the risk that accompanies it. Debt-to-equity ratio has to be considered as an important source of NAV premiums as highly geared A-REITs that favoured debt financing over equity financing traded at significant premiums to NAV of their underlying real estate assets. Practical implications The paper includes implications for the REIT market investors. The regression analysis shows that specialty A-REITs with a focus on creative market niches traded at higher premiums compared with other property stocks, especially in the post-GFC recovery period. Specialty REITs are more highly valued by the market than their traditional specialised counterparts (e.g. office and retail REITs), and those pursuing a diversified strategy. Originality/value This paper presents an Australian case study as the A-REIT market provides a suitable environment for testing the effect of financial gearing on the REIT premium to NAV. The study provides empirical evidence supporting the importance of debt-to-equity ratio in explaining the variation in A-REIT NAV premiums.

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Leverage and NAV discount: evidence from Italian real estate investment funds

Cited by 21 publications

References 27 publications

The Discount to NAV of Distressed Open-End Real Estate Funds

The Discount to NAV of Distressed Open-End Real Estate Funds

The Discount to NAV of distressed German open-ended real estate funds

Explaining the premium to NAV in publicly traded Australian REITs, 2008–2018

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