At the current time, shares are trading at a discount of 13% and the current value of the discount to NAV is approximately £3billion.
Listed property companies have historically been valued according to the Net Asset Value (NAV) model – the NAV being the total value of all of the assets held by a property company. Shares have nearly always traded at a discount to the NAV, for a number of reasons such as lack of control, relative illiquidity and high transaction costs. However the discounts fail to take into account factors such as management expertise, enhanced access to opportunities and finance and risk diversification according to PwC; this, perhaps, has lead to an inappropriately narrow view of the value of property shares.
PwC valuation experts, who review over £100bn of UK property valuations every year, analysed changes in valuation for direct property interests held by UK property companies and institutions. They found that from 1999 to 2009, property shares continually traded at a discount to NAV for the majority of the period. Between mid-2007 and early 2009, commercial property values fell by 44%. They then rallied by 17.7% but have fallen by 1.6% since October 2011.
Craig Davies, PwC real estate director and index author, said:
“The outlook for the property market, with the continued instability in the eurozone, is highly uncertain to say the least. Overall commercial property values are flat and we are seeing tenants going out of business, particularly in the retail sector but, on the other hand, there is continued strong demand from wealthy overseas investors for prime London office blocks and retail outlets with secure income streams.
“Never before have we seen such a polarised, two-tier market. There is a strong argument for reassessing the value of listed property companies – particularly those who own many of these prime assets, have the expertise to asset manage opportunities and have access to finance.
“With shares currently trading at a 13% discount, and no short-term improvement in the availability of debt or general demand, it is time to take a look at the way we value property shares.”
The overall PwC Valuation Index, which covers the UK economy as a whole, stood at 99 at the end of June 2012, up from 84 at the end of the last quarter of 2011. This means that the PE (price/earnings) ratio for the overall market was down 6% on the previous quarter.
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