DO THE PRICES OF HIGH DIVIDEND REITS DEVIATE MORE FROM THEIR NAV

Abstract

The pricing of Real Estate Investment Trusts (REITs) in relation to the value of their underlying assets has attracted much research attention. Most studies have sought to explain why REITs have traded at a premium or discount to the fundamental value of assets as measured by the Net Asset Value (NAV). This study aims to provide new information on the dynamics of REIT pricing using the Price to Book ratio (PB) as a measure of underlying asset value. It examines whether the divergence of the price of a REIT from its PB is dependent on the nature of the REIT, i.e. as an income or appreciation vehicle. Unlike more mature REIT markets, the Singapore REIT (SREIT) market comprises relatively more growth stocks than pure dividend plays. Hence, SREITs provide an opportunity to determine if deviations of price from the PB ratio can be explained by its income versus growth nature. The data is from 2002 to 2010, with a partition to allow for differences pre- and post-financial crisis. The study finds that high-dividend paying REITs deviate more from their underlying values. Investors potentially perceived them as safer investments and would pay an additional premium or extract a smaller discount in terms of its share price to PB. There was a greater divergence between 2002 and 2008 as compared to the 2009 to 2010 period. It is likely that the financial crisis in late 2008 caused value destruction that resulted in REITs trading at a larger discount than before the crisis took hold.