Examining the Deviation to Net Asset Value for Swedish Listed Property Companies

Abstract: Net asset value (NAV) is commonly used to represent the value of a property company. For listed property companies a secondary valuation occurs simultaneously as the company’s stocks are traded on the stock market. Historically, a deviation between the NAV and the market capitalisation has been found for property companies implying that the stock market values the company differently. This thesis examines the deviation to NAV for 14 Swedish listed property companies during 2006-2015. The examination explains the deviation from the basis of a rational and an irrational approach. The thesis investigates empirically which factors that have affected the deviation by the use of a panel data regression analysis. The rational approach investigates the impact of company-specific, share-specific and corporate governance variables. The results of the thesis show that the rational variables can explain the deviation to NAV to some extent. The main contribution comes from companyspecific variables. Larger companies, companies focused on fewer locations, companies with a better reputation among asset managers and companies with a higher amount of insider ownership are negatively correlated to the discount to NAV. These company characteristics thus suggest a decrease in discounts to NAV (increase in premiums). At the same time companies with a higher loan to value, focus on property type and systematic risk increase the discount to NAV (decrease in premiums). The final rational model produces an adjusted R-square of 37.4% for the Swedish listed property market during the investigated period. The irrational approach investigates the impact of noise traders. The results show that the contribution of market sentiment is significant. The confidence indicator for the households has the greatest impact on the discount to NAV and an inclusion of the variable increases the adjusted R-square to 53.6%. An investigation into the justification of using the Noise Trader Theory is conducted and concludes that the use of a proxy for market sentiment is justified.