Mean-Reversion in REITs Discount to NAV & Risk Premium

REITs discount to NAV is a puzzling regularity. The sharp increase in volatility of REITs prices over the past few years has spurred a relatively new concern amongst academics, managers and investors about the consequences of, and causes of, property risk premium on discount to NAV. The two interrel...

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Bibliographic Details
Published in:The journal of real estate finance and economics 2009-10, Vol.39 (3), p.229-247
Main Authors: Patel, Kanak, Pereira, Ricardo A. M. G., Zavodov, Kirill V.
Format: Article
Language:English
Subjects:
Cash flow forecasting
Discount rates
Discounted cash flow
Discounts
Economic models
Economic statistics
Economic theory
Economics
Economics and Finance
Financial Services
Hypotheses
Investment trusts
Investments
Investors
Liquidity
Private property
Property values
Public property
Real estate
Regional/Spatial Science
REITs
Risk
Risk premiums
Securities markets
Stock exchanges
Stock prices
Studies
Valuation methods
Value
Volatility
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Summary:REITs discount to NAV is a puzzling regularity. The sharp increase in volatility of REITs prices over the past few years has spurred a relatively new concern amongst academics, managers and investors about the consequences of, and causes of, property risk premium on discount to NAV. The two interrelated questions arising from the recent increase in volatility of REITs prices are: Is the increased volatility responsible for the observed widening in discount to NAV? What does the observed private and public risk premium tell us about discount to NAV? We attempt to address these questions by analysing risk premiums in private and public real estate markets. The analysis is conducted in the most recent years of high stock price volatility. Our analysis reveals two major results: a tendency for discount to NAV to revert to the long term mean value of 20% and, more significantly, a lower risk premium in equivalent yields in private market than in public market. These results suggest that investors in public market have a different conception of property risk and complexity of lease options than what is conveyed by private property valuation.
ISSN:0895-5638
1573-045X
DOI:10.1007/s11146-009-9185-z