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Valuation is attractive compared to direct real estate

One simple metric to assess the valuation of listed real estate companies is to look at their share price compared to the Net Asset Value per share (NAV) as calculated by independent surveyors. Companies can trade with a discount or a premium to this NAV, but in an efficient market we tend to argue that companies should always trade at a certain premium to their spot NAV. This is for the following reasons:

01A portfolio of diversified assets is worth more than just the sum of the value of the individual assets.

02 Strong management teams create value and growth by working on the portfolio, something which is not reflected in the NAV.

The current average sector discount to NAVs is in effect around 18% for Europe (16% for Eurozone) suggesting that investors expect asset values to decline. Based on the latest direct real estate market information, we anticipate that, on average, NAVs will continue to grow by circa 4% p.a. for the next 2-3 years, not only for prime assets but now also for more secondary assets. Therefore, we see the listed market as relatively attractively valued, with prospects for standard listed real estate returns of around 8% for the next 12 months in a base case scenario.

Discount or premium to NAV and NAV growth for the European listed property sector

Source: Company data, Datastream, Morgan Stanley Research, Date: 28.02.2019

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