Property Company Stock Price and Net Asset Value: A Mean Reversion Perspective

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 UK 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 towards the property companies' NAVs over the past fifteen 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.

Keywords: Property stock price, Net asset value, Mean reversion, Valuation, Singapore