Part A

Sell-side:

• Works for brokers/investment banks; publishes target prices and Buy/Hold/Sell recommendations

• Objective: Drive market activity and generate trading commissions.

• Common valuation methods:

  • P/E multiples (based on forecast earnings)

  • NAV ± premium/discount

  • Dividend Discount Model (DDM) for income REITs

  • Peer group comparisons across all metrics (P/NAV, P/E, yield)

  • may use aggressive assumptions to justify calls

• Time horizon: 2 years forward forecast

Buy-side:

• Works for asset managers/pension funds; makes internal portfolio decisions.

• Objective: Achieve portfolio outperformance (alpha).

• Use deeper and risk-adjusted valuation approaches:

  • Adjusted NAVs with stressed assumptions

  • Scenario analysis for macro factors

  • Relative valuation across peer group (P/NAV, DY, Debt levels) for over-/underweight calls (cheap or expensive relative to peers)

  • assumptions more cautious and strategic

• Time horizon: longer-term, benchmark-relative

12-month share price forecast set by a sell-side analyst forms basis for Buy/Hold/Sell recommendation

1. Company analysis

2. Calculate key per-share metrics: EPS, NAV per share, and dividend forecasts

3. Forecast accounting metrics: Rental income, admin costs, interest payable, Gross Assets, debt profile

4. Select valuation methodology

5. Apply peer group multiples or justified premiums/discounts

6. Set the Target Price

7. Give Recommendation: buy/hold/sell based on up-/downside to current price

1. Different forecast assumptions: e.g. rent growth, yields, inflation

2. Different valuation methods: NAV premiums vs earnings multiples vs DDM

3. Varying macro views: interest rates, inflation

4. Different company access = different assumptions

5. Strategic bias: Some analysts issue more bullish/conservative targets to support banking relationships

Private Markets: (Gross Assets - Debt)/shares outstanding (NAV per Share)

Public Markets: ((Share Price / NAV per Share)-1)*100 (NAV Discount/Premium)

Persistent discounts may indicate market distrust or sector-level pessimism; premiums may reflect growth expectations or takeover speculation.

1. NAV = Appraised, backward-looking

2. Market price = Forward-looking, reflects sentiment, macro, risk

3. Divergence due to:

   • Timing: appraisal lag vs real-time pricing

   • Market sentiment & liquidity: Share prices reflect broad market moves and investor flows; discounts to NAV can arise from panic selling or liquidity needs, not asset value changes.

   • Capital Structure: REITs with high leverage = higher discount (riskier); transparency regarding debt maturity, refinancing

   • Investor base: only 1/3 are property specialists

   • Cycle position: public market lead private valuations in the real estate cycle

   • Company-specifics: ESG, dividends, management can shift sentiment away from NAV

Example:

1. Brexit (June 2016)

• Derwent London, seen as a well-managed London office REIT, experienced an overnight share price drop of >30% after the EU referendum.

• Despite the sharp fall, the London office market held up relatively well in the two years that followed.

Key Insight: The sell-off was driven more by investor sentiment and macro fear than by immediate changes in fundamentals

1. Rental income = top-line, asset quality

2. Admin expenses = efficiency

3. Interest payable = debt burden, risk

4. Gross assets = portfolio size

5. Net debt = used to calculate LTV

-> indicate financial health of a company

Importance

• basis for forecasting and scenario analysis

• support peer benchmarking

• cross border valuations

• universally available in IFRS-based reporting, if accounting differences, adjustments should be made (IFRS and US GAAP)

• Buy Side: Fund managers and analysts investing on behalf of clients

  ➝ Motivation: Fund performance, fee income

• Sell Side: Analysts and salespeople producing research

  ➝ Motivation: Trading commissions, banking revenue

• Investment Banking: Executes M&A, debt, and equity issuance

  ➝ Motivation: Advisory & transaction fees

• Compliance: Enforces regulatory separation (Chinese Wall)

• Measured by market cap, not NAV

• Free-float market cap = total shares × price × % available to trade

• Used to weight indices like EPRA/NAREIT

Simple Example (from Week 11)

• Liquidity: Daily trading

• Transparency: Reporting requirements

• Income: High dividends due to payout rules

• Diversification: Low entry barrier

• Global access: International exchanges

• Index eligibility: Attracts passive capital

• Listed RE (REITs):

  • Market-traded

  • Higher volatility

  • Income-focused: Typically, high dividend yields due to payout requirements (e.g. 90% of taxable profits)

  • Gearing: Can amplify returns (or losses), depending on leverage structure

• Unlisted Funds:

  • NAV-based pricing quarterly or semi-annual valuations reduce volatility

  • Return smoothing: Valuations are appraisal-based and backward-looking

  • Access to high-quality core assets: Often longer leases, lower volatility

  • Leverage: Varies by fund style (e.g. Core vs Value Add)

• Direct Real Estate:

  • Individual asset ownership: Allows full control but lacks diversification

  • Illiquid: High transaction costs and long exit timelines

  • Returns depend on: Asset quality, location, lease terms, and management ability.

  • Often used by institutions for liability matching (e.g. DB pension schemes).