Abstract
This study investigates the relationship between property company stock prices (P) and their net asset values (NAV) from a mean reversion perspective. In contrast to U.K. evidence, we find that there is absence of a long-term stable relationship between the two series. However, the variance ratio tests and multi-period regressions suggest that both P and NAV series have exhibited transitory components. In addition, there is some evidence of mean reversion behavior of Singapore property stock prices toward the property companies' NAVs over the past 15 years from 1985 to 1999, both at individual company level and in the sector as a whole. The results also reveal that NAV, as a traditional proxy to fundamental value, is significant in capturing the dynamics of the changes in property stock prices. Hence NAV is relevant in property company valuation. However the extent of mean reversion between the property stock prices and NAVs is slow and deviations between the two markets' valuation could therefore be prolonged.
Similar content being viewed by others
References
Adams, A., and P. Venmore-Rowland. (1989). “Property Share Valuation,” Journal of Property Valuation 8(2), 127-142.
Adams, A., and A. Baum. (1989). “Property Securitization: Premium or Discount?” Investment Analyst (91), 31-38.
Barkham, R. J., and C. W. R. Ward. (1999). “Investor Sentiment and Noise Traders: Discount to Net Asset Value in Listed Property Companies in the U.K.,” Journal of Real Estate Research 18(2), 291-312.
Bonser-Neal, C., G. Brauer, R. Neal, and S. Wheatley. (1990). “International Investment Restrictions and Closed-End Country Fund Prices,” Journal of Finance 45(2), 523-547.
Brauer, G. A. (1988). “Closed-End Fund Shares' Abnormal Returns and the Information Content of Discounts and Premiums,” Journal of Finance 43(1), 113-127.
Campbell, J. Y., and R. L. Shiller. (1988). “Stock Prices, Earnings, and Expected Dividends,” Journal of Finance 43(2), 661-676.
Chiang, R., I. Davidson, and J. Okunev. (1997). “Some Further Theoretical and Empirical Implications Regarding the Relationship Between Earnings, Dividends and Stock Prices,” Journal of Banking and Finance 21, 17-35.
Chiang, R., P. Liu, and J. Okunev. (1995). “Modeling Mean Reversion of Asset Prices Towards their Fundamental Value,” Journal of Banking and Finance 19, 1327-1340.
Fama, E. F., and K. R. French. (1988). “Permanent and Temporary Components of Stock Prices,” Journal of Political Economy 96(2), 246-273.
Johansen, S. E. (1988). “Statistical Analysis and Cointegrating Vector,” Journal of Economic Dynamics and Control 12, 231-254.
Lee, C. M. C., A. Shleifer, and A. R. H. Thaler. (1991). “Investor Sentiment and the Closed-End Fund Puzzle,” Journal of Finance 46(1), 75-109.
Liow, K. H. (1996). “Property Companies' Share Price Discounts and Property Market Returns: The Singapore Evidence,” Journal of Property Finance 7(4), 64-77.
Liow, K. H. (2000). “Corporate Financial Reporting of Singapore Property Companies: Issues and Evidence,” Journal of Financial Management of Property and Construction 5(3), 149-158.
Lo, A., and A. MacKinlay. (1988). “Stock Market Prices do not Follow Random Walks: Evidence from a Simple Specification Test,” Review of Financial Studies 1(1), 41-66.
Okunev, J., and P. J. Wilson. (1997). “Using Nonlinear Tests to Examine Integration between Real Estate and Stock Markets,” Real Estate Economics 25(3), 487-503.
Poterba, J. M., and L. H. Summers. (1988). “Mean Reversion in Stock Prices—Evidence and Implications,” Journal of Financial Economics 22(1), 27-59.
Steinert, M., and S. Crowe. (2001). “Global Real Estate Investment: Characteristics, Optimal Portfolio Allocation and Future Trends,” Pacific Rim Property Research Journal 7(4), 223-239.
White, H. A. (1980). “Heteroskedasticity—Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity,” Econometrica 48, 55-68.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Liow, K.H. Property Company Stock Price and Net Asset Value: A Mean Reversion Perspective. The Journal of Real Estate Finance and Economics 27, 235–255 (2003). https://doi.org/10.1023/A:1024780404907
Issue Date:
DOI: https://doi.org/10.1023/A:1024780404907