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- Title
Mean-Reversion in REITs Discount to NAV & Risk Premium.
- Authors
Patel, Kanak; Pereira, Ricardo A. M. G.; Zavodov, Kirill
- Abstract
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.
- Subjects
REAL estate investment trusts; RISK premiums; NET Asset Value; PERSONAL managers; PERSONAL property; VALUATION
- Publication
Journal of Real Estate Finance & Economics, 2009, Vol 39, Issue 3, p229
- ISSN
0895-5638
- Publication type
Article
- DOI
10.1007/s11146-009-9185-z