Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You or Your Team.

Learn More →

The impact of liquidity on the valuation of European real estate securities

The impact of liquidity on the valuation of European real estate securities Purpose – The purpose of this paper is to test the hypothesis that the valuations of European real estate securities are, in part, determined by the relative liquidity in the companies’ shares. Design/methodology/approach – Six groups are derived for our sample of European listed real estate companies. They are split between the UK and Europe, and then both sets are categorised by liquidity as large, medium or small. These are then tested for market depth, market tightness and difference in valuations over the cycle 2002‐2012. Intuitively, it can be expected that the stock market valuation premium for companies with greater liquidity increases post the global financial crisis. Findings – The key discriminating variable that drives companies’ liquidity and valuations is market capitalisation. For both the UK and Europe, the valuation premium of larger companies vs small companies has increased significantly since 2008 (by 20‐40 per cent), which can be attributed to the increased value placed on liquidity post GFC. Research limitations/implications – The sample size is relatively small, and subject to individual company influences on stock market valuation. Practical implications – The key implications from the findings are the cost and quantum of new equity capital available to companies with superior liquidity, and the possibility of exclusion from portfolios for companies with low liquidity. Originality/value – Previous studies have focussed on returns for measuring a liquidity premium. This study focusses on relative valuations and how the liquidity premium changes throughout the cycle. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of European Real Estate Research Emerald Publishing

The impact of liquidity on the valuation of European real estate securities

Alex Moss
Journal of European Real Estate Research , Volume 7 (2): 19 – Jul 29, 2014
Download PDF
19 pages

Loading next page...
 
/lp/emerald-publishing/the-impact-of-liquidity-on-the-valuation-of-european-real-estate-D0S8tEwAdb
Publisher
Emerald Publishing
Copyright
Copyright © 2014 Emerald Group Publishing Limited. All rights reserved.
ISSN
1753-9269
DOI
10.1108/JERER-12-2013-0026
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this paper is to test the hypothesis that the valuations of European real estate securities are, in part, determined by the relative liquidity in the companies’ shares. Design/methodology/approach – Six groups are derived for our sample of European listed real estate companies. They are split between the UK and Europe, and then both sets are categorised by liquidity as large, medium or small. These are then tested for market depth, market tightness and difference in valuations over the cycle 2002‐2012. Intuitively, it can be expected that the stock market valuation premium for companies with greater liquidity increases post the global financial crisis. Findings – The key discriminating variable that drives companies’ liquidity and valuations is market capitalisation. For both the UK and Europe, the valuation premium of larger companies vs small companies has increased significantly since 2008 (by 20‐40 per cent), which can be attributed to the increased value placed on liquidity post GFC. Research limitations/implications – The sample size is relatively small, and subject to individual company influences on stock market valuation. Practical implications – The key implications from the findings are the cost and quantum of new equity capital available to companies with superior liquidity, and the possibility of exclusion from portfolios for companies with low liquidity. Originality/value – Previous studies have focussed on returns for measuring a liquidity premium. This study focusses on relative valuations and how the liquidity premium changes throughout the cycle.

Journal

Journal of European Real Estate Research – Emerald Publishing

Published: Jul 29, 2014

Keywords: Valuation; REITs; Liquidity premium; European listed real estate; Parallel asset pricing

References

  • The effects of beta, bid‐ask spreads, residual risk and size on stock returns
    Amihud, Y.; Mendelson, H.
  • Illiquidity and stock returns: cross‐section and time‐series effects
    Amihud, Y.; Mendelson, H.
  • Measuring a premium for liquidity risk
    Anson, M.
  • Changes in REIT liquidity 1990‐1994: evidence from intra‐day transactions
    Bhasin, V.; Cole, R.; Kiely, J.
  • The distribution of REIT liquidity
    Blau, B.; Nguyen, N.; Whitby, R.
  • Exchange rate risk and bid‐ask spread: a seven country comparison
    Boothe, P.
  • Investment analysis and price formation in securities markets
    Brennan, M.J.; Subrahmanyam, A.
  • Market microstructure and asset pricing: on the compensation for illiquidity in stock returns
    Brennan, M.J.; Subrahmanyam, A.
  • The liquidity of property shares: an international comparison
    Brounen, D.; Eicholtz, P.; Ling, D.
  • Market liquidity and funding liquidity
    Brunnermeier, M.K.; Pedersen, L.H.
  • Changes in REIT liquidity 1988‐2007: evidence from daily data
    Cannon, S.; Cole, R.
  • Measuring and explaining changes in REIT liquidity: moving beyond the bid‐ask spread
    Clayton, J.; MacKinnon, G.
  • The relative importance of stock, bond and real estate factors in explaining REIT returns
    Clayton, J.; MacKinnon, G.
  • The cross‐section of expected stock returns
    Fama, E.F.; French, K.R.
  • Price clustering and bid‐ask spreads in international futures
    Gwilym, O.; Clare, A.; Thomas, S.
  • Common factors in prices, order flows, and liquidity
    Hasbrouck, J.; Seppi, D.
  • Liquidity Premium – Literature Review of Theoretical and Empirical Evidence
    Hibbert, J.; Kirchnor, A.; Krotzschmar, ; McNeil, A.
  • Market value of REIT liquidity
    Hill, M.; Kelly, W.; Hardin, W.
  • Are REITS real estate? Evidence from international sector level data
    Hoesli, M.; Oikarinen, E.
  • Comparative Liquidity Advantages Among Major US Stock Markets, DRI Financial Information Group Study Series
    Hui, B.; Huebel, B.
  • Liquidity as an investment style
    Ibbotson, R.; Chen, Z.; Kim, D.; Hu, W.
  • Continuous auctions and insider trading
    Kyle, A.S.
  • Liquidity of European real estate equities: REITs and REOCs
    Niskanen, J.; Falkenbach, H.
  • Market Microstructure Theory
    O’Hara, M.
  • Pioneering Portfolio Management
    Swensen, D.
  • Liquidity ‐driven dynamic asset allocation
    Xiong, J.; Sullivan, R.; Wang, P.