Indirect real estate: price does not determine value

The price paid on the stock market reflects the market’s appetite but also its excesses of optimism or pessimism depending on the economic cycle.

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If the generation and distribution of income are the key to long-term performance for the various indirect real estate securities, we have seen that the stock market price of the latter has been quite battered in 2022 and 2023. Indeed, between July 2021 and October 2023, the SWIIP index1 dropped by almost -25%! Does this mean that the value of the underlying real estate holdings has been reduced by a quarter? No… At the same time the IREAL index2 gains +13%, meaning that on average, a Swiss investment property was trading 13% more expensive in October 2023 than in July 2021.

So how can we not mix everything up? By differentiating 3 main notions: firstly the stock market price of real estate vehicles (listed funds and real estate companies). This price corresponds to the price at which shareholders and unit holders exchange the security. It fluctuates constantly and is impacted by supply and demand, the economic situation, the expectations of shareholder-investors as well as their assessment of the underlying quality of the real estate portfolio, its strategy and its management. The price paid on the stock market therefore reflects the market’s appetite but also its excesses of optimism or pessimism depending on the economic cycle.

Fortunately, to provide transparency on their assets – the value of which is not observable – and to give an indication to the investor, these securities publish each year the revalued net value of their equity. In the context of real estate, this reassessed value depends almost exclusively on the financial estimate of the buildings carried out annually by independent appraisers. So when stock market prices lost 25%, the net asset value (NAV) of listed funds gained around 5% over the same period, without taking into account the income distributed in the form of dividends, proof that in all likelihood the value of their assets had not declined, at least according to the evaluators.

Finally, if you carefully read the annual reports of indirect real estate vehicles, you will find a third very interesting value: the accounting cost price of the buildings, i.e. the historical purchase cost as well as the heavy maintenance investments made since then. . This is very important data to relate to the value of the equity raised in the past: it is this value which permanently fixes the yield of the real estate portfolio and therefore the dividend yield of each existing share. It is also recommended to compare book price and valuation value of buildings on a regular basis in order to examine the latent capital gain generated by the manager.

Consequently, if the stock market price is probably the most transparent in the short term and allows us to take a snapshot of the state of the current market and future expectations, we should not hesitate to compare it to the net asset value, absolutely then relatively, for the entire index. In this way, you will detect the sentiment of the market as a whole, on a real estate sub-sector but also on a particular security. Fundamental analysis and in particular observation of financial statements will then allow you to determine whether this feeling is justified! Finally, in the long term, the return paid on the purchase of buildings permanently fixes the profitability of the vehicle and should therefore be carefully analyzed and compared.

1 The SXI Real Estate® Funds Broad PR index represents the stock market price of the 42 Swiss real estate funds listed on the SIX Swiss Exchange.

2 The SWX IAZI Investment Real Estate Price index represents the evolution of the value of investment properties (residential and commercial) and is based on observation of the real estate transaction market on a national scale.

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