Morgan Stanley IM: Record Wide NAV discounts - Time to buy listed real estate?

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Discounts in European listed real estate have rarely been this wide. Long-term investors should take note.

Investors have multiple choices when deciding to invest in real estate: They can buy buildings directly; they can give money to mutual funds that invest in buildings; or they can invest in listed stocks, via companies that develop, own and manage large commercial and residential real estate portfolios in closed-ended, publicly listed vehicles.

Despite challenges from higher interest rates, we note that public real estate stocks’ discounts to underlying independent appraisal values in Europe are close to historically wide levels, looking back over the last 30 years. We also show that, on average, for listed real estate, future returns increase the wider this discount is. This is particularly relevant on a five-year view and/or when discounts are very extreme.

As can be seen in Display 1, the discount to last-reported net asset value (NAV) of the larger European listed real estate companies has expanded to over 40% as at August 2023. These depressed levels are witnessed only occasionally, such as during the global financial crisis of 2008-2009 and the European Exchange Rate Mechanism (ERM) debacle in 1992. Other, less extreme lows, occurred when traditional real estate was out of favour during the tech stock boom of the early 2000s, and, of course, during the COVID-19 pandemic.

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