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The impact of liquidity on the valuation of European real estate securities

Moss, A. and Lux, N. (2014). The impact of liquidity on the valuation of European real estate securities. Journal of European Real Estate Research, 7(2), pp. 139-157. doi: 10.1108/JERER-12-2013-0026

Abstract

Purpose: The purpose of this paper is to test the hypothesis that the valuations of European real estate securities are, in part, determined by the relative liquidity in the companies’ shares.

Design/methodology/approach: Six groups are derived for our sample of European listed real estate companies. They are split between the UK and Europe, and then both sets are categorised by liquidity as large, medium or small. These are then tested for market depth, market tightness and difference in valuations over the cycle 2002-2012. Intuitively, it can be expected that the stock market valuation premium for companies with greater liquidity increases post the global financial crisis.

Findings: The key discriminating variable that drives companies’ liquidity and valuations is market capitalisation. For both the UK and Europe, the valuation premium of larger companies vs small companies has increased significantly since 2008 (by 20-40 per cent), which can be attributed to the increased value placed on liquidity post GFC.

Research limitations/implications: The sample size is relatively small, and subject to individual company influences on stock market valuation.

Practical implications: The key implications from the findings are the cost and quantum of new equity capital available to companies with superior liquidity, and the possibility of exclusion from portfolios for companies with low liquidity.

Originality/value: Previous studies have focussed on returns for measuring a liquidity premium. This study focusses on relative valuations and how the liquidity premium changes throughout the cycle.

Publication Type: Article
Publisher Keywords: REITs; Liquidity premium; Valuation; European listed real estate; Parallel Asset Pricing
Departments: Cass Business School > Finance
URI: http://openaccess.city.ac.uk/id/eprint/18453
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