1. Value Premium in International REITs ERES Conference 2014 Ytzen van der Werf and Fred Huibers 27 June 2014 y.vanderwerf@asre.nl

2. Outline Introduction Aim Literature review Methodology Data Results Conclusion

3. Introduction Value investing attractive for common stocks Value premium internationally accepted phenomenon Value premium = excess return from buying cheap and selling expensive stocks Extensively researched within common equities Latest research into question whether it is a reward for risk or rather a result of behavioural inaccuracy

4. Aim of this study To find out whether: A.the value premium exists for REITs in international developed markets and B.whether it is a reward for risk or a behavioural phenomenon

5. Literature review RE Vast number of studies into US REITs Some find consistent value premium in US REITs for the 90’s. Gentry et al. (2004) 11- 22%. Ooi et al. (2007) 8.5%. One study into direct real estate (Addae et al. 2013). Assume properties with low initial yield are growth investments. Find value premium of 6% p.a. for offices and 8% for retail. No study so far into non-US REITs

6. Methodology Exclude REITs with negative Book to Market and daily trading volume < 0.5 million EUR Rank stocks at the 30 th of June each year on book to market (B/M) After ranking the REITs, we group them into Quintiles (20% highest B/M = Value REITs). Calculate the equally weighted average return of the different (quintile) portfolios, assuming an equal amount is invested in each REIT

7. Methodology Book to Market multiple 1.00 Highest Lowest 0.00 Discount to NAV Premium to NAV 30 June

8. Methodology Book to Market multiple 1.00 Highest Lowest 0.00 Discount to NAV Premium to NAV Q1 Q5 Q2 Q3 Q4 30 June

9. Methodology 1.00 Highest Lowest Discount to NAV Premium to NAV Q1 Q5 Value REITs Growth REITs annual portfolio return 1 July – 30 June 30 June annual portfolio return 1 July – 30 June

10. Data International Developed REITs with viewpoint of European Investor (returns in Euro) 23 countries with a total of 1,152 REITs Use minimum daily trading volume of 0.5 m EUR to ensure liquidity and positive B/M

11. Results Characteristics (Q1 = Value REITs) *** significant at 1% level Cumulative Total Returns (1,2,3 year holding) ** significant at 5% level; *** significant at 1% level TR1 is the average yearly return of holding a value (growth) portfolio for 1 year and then rebalance the portfolio with (possible) new REITs with high (low) book to market multiples. TR02/03 cumulative total return of 2/3 years after portfolio formation Q1Q2Q3Q4Q5Diff. Q1-Q5 B/M2.231.06.84.65.361.86*** MV (m EUR)4455987491,0791,5431,098*** Q1Q2Q3Q4Q5Diff. Q1-Q5 TR1.218.145.130.100.115.103 ** TR02.439.276.236.266.173 ** TR03.712.464.435.378.422.290***

12. Explanation (I) Risk based school of thought (Fama and French) Higher return is a reward for higher risk Test whether volatility of value REITs is higher or whether beta within CAPM framework is higher for value stocks * significant at 10% level ** significant at 5% level *** significant at 1% level

13. Explanation (II) Behavioural school of thought (Lakonishok) Higher return in value REITs is a result of naive extrapolation of results from the past to the future Test whether growth REITs indeed show higher past performance and whether this changes after portfolio formation and vice versa Performance measured as Total Return

14. Explanation (III) Pre and post-formation total return performance ** significant at 5% level; *** significant at 1% level

15. Conclusion International developed REITs exhibit a significant value premium of 10.3% (1993-2013) compared to a 8.3% premium Ooi et al. (2007) found in US REITs (1993-2002) Value premium is not a reward for additional risk (nor volatility or CAPM model) Value premium seems to be a result of naive extrapolation of past performance

16. Questions?

17. Thank you for your attention

18. Average B/M Average book value of Equity versus market value of Equity by Quintile (Q1=Value, Q5 = Growth)

19. Market Cap Average Market Cap by Quintile

20. Explanation (IV) Pre and post formation dividend growth ** significant at 5% level; *** significant at 1% level

21. 3-factor model

22. suggestions Transaction costs Net Asset Value vs Book Value of Equity Stipulate contribution to the Literature Keep it easy (step by step) Controlled for difference in size?