NAV discount of property stocks : evidence from Singapore and Hong Kong

Abstract

From a valuation perspective, the worth of a property company is based on its Net Asset Value (NAV). It represents the underlying value of the company’s assets. Fundamentally, property company share prices should trade at around their NAV, because these shares are essentially claims on assets. In reality however, share prices can deviate from NAV persistently over long periods of time. The aim of this study is to better understand NAV discount behaviour. To that end, three related issues are explored. Firstly, this study studied the long term NAV discount behaviour and found that over the period from 2000 to 2010, Singapore and Hong Kong property companies traded at a quarterly NAV discount of 105% and 140% respectively. About three-quarters of them also trade consistently or mostly at a NAV discount. Property investment companies trade at the largest NAV discounts, while property development companies trade at the highest Price-Earnings ratio (PER). Secondly, this study explores the relationship between NAV discount and direct property returns. Statistically significant correlations were found between lagged NAV discounts and the property market for up to six quarters and two quarters for Singapore and Hong Kong respectively. Up to 71% and 57% of the variability of property market can be explained by the current and lagged NAV discounts in the property equity sector for Singapore and Hong respectively. Thirdly, a case study is conducted for the top three Singapore and Hong Kong property companies in terms of market capitalization. At least where the top three companies are concerned, Hong Kong property companies are bigger and also use lesser debt to finance their growth. The results also shows that investors prefer property hybrid companies, as evidenced by the higher PER ascribed to them. The companies were also ranked according to six key indicators. City Developments and Sun Hung Kai came out tops for Singapore and Hong Kong respectively over the 2006 to 2010 period.