Journal of Real Estate Finance and Economics, 27:2, 235±255, 2003
# 2003 Kluwer Academic Publishers. Manufactured in The Netherlands.
Property Company Stock Price and Net Asset Value:
A Mean Reversion Perspective
KIM HIANG LIOW
Department of Real Estate, National University of Singapore, 4 Architecture Drive, 117566, Singapore
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 ®nd 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 signi®cant 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.
Key Words: property stock price, net asset value, mean reversion, valuation, Singapore
There are two common types of indirect or securitized real estate investment vehicles
available to investors. The ®rst type is the Real Estate Investment Trusts (REITs) in the
United States. The second type of securitized real estate investment, popularly known in
countries such as the United Kingdom, Hong Kong and Singapore, consists of shares of
property companies quoted on a stock market. Speci®cally listed property companies have
become an increasing important property investment vehicle in Asia and internationally.
Property investment companies can be characterized as pools of professionally
managed income producing properties in which investors can participate in their ®nancial
results. For these companies, there is normally a close correlation between the value of the
property portfolio and the value of companies' shares that are priced in relation to the net
asset value (NAV) rather than on a price-to-earnings. The NAV in this context represents
the underlying value of the real estate assets owned along with other assets, adjusted for
liabilities and other claims on the company. The main argument is that at a fundamental
level, property company share prices must re¯ect their underlying real estate investment
value. One important question arising from this linkage is the nature and extent of the
relationship between property stock price and NAV both in the long-run and short-term.
This study seeks to empirically address this question.