“Cheap" property holding stocks: Opportunity of a lifetime or too good to be true? - An empirical test of investment strategies based on stock price / EPRA NAV multiples for Swedish property holding stocks.

Abstract

This thesis tests the reliability of EPRA NAV (European Public Real estate Association Net Asset Value) as a measure for stock prices in property holding firms. The law of one price dictates that the price of a listed asset should equal the price of a private asset, however, this is not the case for property holding firms as the stock prices deviate from the EPRA NAV. We test the reliability of the EPRA NAV measure by constructing two portfolio strategies. One portfolio strategy trades on cheap stock price / EPRA NAV multiples, where the majority of the portfolio's stock trades at a discount to EPRA NAV. The other portfolio strategy trades on expensive stock price / EPRA NAV multiples, where the majority of the portfolio's stock trades at a premium to EPRA NAV. We try to explain the reliability of EPRA NAV by comparing the abnormal returns, which we retrieve using OLS regressions applied to the Five-Factor model by Fama & French. We find that both investment strategies produce abnormal returns, where the strategy trading on expensive stocks outperforms the strategy trading on cheap stocks, this goes against the efficient market hypothesis as the strategies produce abnormal returns. Furthermore, we find that there is little recent research regarding net asset value and stocks for the real estate sector, where all previous research aims to explain the underlying factors behind the spreads. This thesis takes a different approach where we empirically test if abnormal returns can be achieved by investing on these spreads. Furthermore, we find no empirical research that regards stock price to EPRA NAV spreads. Our results therefore contribute to the understanding of stock price / NAV spreads for property holding firms and the understanding the quality of EPRA NAV as a measure of firm value. Moreover, our results provide interesting discussion points that regard EMH and behavioral finance.