Underpricing and market timing in SEOs of European REITs and REOCs

Publication Date13 December 2019
AuthorFelix Lorenz
SubjectProperty management & built environment,Real estate & property,Property valuation & finance
Underpricing and market
timing in SEOs of European
Felix Lorenz
International Real Estate Business School,
University of Regensburg, Regensburg, Germany
Purpose The purpose of this paper is to contribute to the literature on seasoned equity offerings (SEOs) by
examining the underpricing of European real estate corporations and identifying determinants explaining the
phenomenon of setting the offer price at a discount at SEOs.
Design/methodology/approach With a sample of 470 SEOs of European real estate investment trusts
(REITs) and real estate operating companies (REOCs) from 2004 to 2018, multivariate regression models are
applied to test for theories on the pricing of SEOs. This paper furthermore tests for differences in
underpricing for REITs and REOCs as well as specialized and diversified property companies.
Findings Significant underpricing of 3.06 percent is found, with REITs (1.90 percent) being statistically
less underpriced than REOCs (5.08 percent). The findings support the market timing theory by showing that
managers trying to time the equity market gain from lower underpricing. Furthermore, underwritten
offerings are more underpriced to reduce the risk of the arranging bank, but top-tier underwriters are able to
reduce offer price discounts by being more successful in attracting investors. The results cannot support the
value uncertainty hypothesis, but they are in line with placement cost stories. In addition, specialized property
companies are subject to lower underpricing.
Practical implications An optimal issuance strategy taking into account timing, relative offer size and
the choice of the underwriter can minimize the amount of money left on the tableand therefore contribute to
the lower cost of raising capital.
Originality/value This is the first study to investigate SEO underpricing for European real estate
corporations, pricing differences of REITs and REOCs in seasoned offerings and the effect of market timing
on the pricing of SEOs.
Keywords Europe, Market timing, Underpricing, SEO, Equity offering, Offer price discount
Paper type Research paper
1. Introduction
As stated by Ghosh et al. (2000), seasoned equity offerings (SEOs) are major events in the
lifetime of a listed property company that are essential to ensure profitable growth and
sustainable development. Especially, real estate investment trusts (REITs) need to regularly
raise money through capital increases and therefore access the capital market more often
than industrial firms due to their limited funding possibilities with restriction on debt ratio
and retained earnings (Boudry et al., 2011). Although SEOs play an important role in listed
companies, issued shares are regularly offered at an offer price significantly lower than the
price the shares are traded on the offer day defined as underpricing or the day before the
offering defined as discounting. Besides the direct cost of raising capital, the issuing firm
is consequently accepting additional expenses as money left on the tableat equity
offerings. Because the extent of underpricing represents potential equity capital, the issuer
decides to forego convincing arguments that must exist to justify such losses.
As stated by Goodwin (2013), equity offerings of property companies, in particular
REITs, are an interesting research topic due to their unique characteristics. Besides
restrictions on the equity ratio and income requirements, REITs are mainly characterized by
their high profit distribution (8095 percent of net profit). Although REITs are an
internationally well-known investment vehicle, there exist country-specific differences in
limitations of their business activity. In addition, the valuation of property companies is
Received 25 July 2019
Revised 30 September 2019
Accepted 4 November 2019
The current issue and full text archive of this journal is available on Emerald Insight at:
and market
timing in SEOs
JournalofProperty Investment&
Vol.38 No. 3, 2020
complex not only due to valuation variation of real estate as the underlying assets, but
relatively low transparency in the real estate sector and the added stock market risk also
contribute to the valuation uncertainty of real estate corporations.
There is existing literature to explain the phenomenon of setting the offer price at a
discount at SEOs. Being mainly focused on industrial firms, far less is known about the
pricing of equity offerings in the real estate sector, especially in Europe. But with more and
more countries establishing the REIT regime, this listed real estate investment vehicle gains
increasing importance in European real estate markets (Ascherl and Schaefers, 2018). To the
authors best knowledge, this is the first study to investigate the underpricing of equity
offerings in the European real estate sector, examine pricing differences for REITs and real
estate operating companies (REOCs) at SEOs, and analyze the impact of market timing
behavior on the pricing of seasoned offerings.
2. Listed real estate markets in Europe
REITs have shown to be anattractive investment alternativein the capital market in the past
decades (Laopodis, 2009), and they have gained increasing significance especially in Europe
(Newell andMarzuki, 2018). Although severalcountries in Europe adopted the REITregime in
the late 2000s, emerging real estate markets in southern and eastern Europe are still into
extending their spectrum of real estate investment vehicles, with Poland and Portugal being
the most recent to establish the REIT regimein 2019. Whereas in 1999, only one REIT existed
in Europe, the value of listed real estate in the European Union reached $387.6bn, with 226
REITs accounting for $186.9bn in market capitalization (EPRA, 2019b). Table I provides an
overview of listed real estate markets in Europe. Regarding total market capitalization of
property companies by country, Germany (92.1bn), the UK (77.0bn) and France (55.5bn)
have shown to be the largestlisted markets in Europe. Whereas Germanyis characterized by
REOCs (e.g.Vonovia with 22.8bn and DeutscheWohnen with 11.5bn) and furtherinvestment
vehicleslike open- and closed-end fundswith only a small proportion beinginvested in REITs,
the UK REIT marketis highly matured, comprising morethan 80 percent of UKs total market
capitalization of listed real estate companies. The same appears for France, where REITs
account for 51.0bnout of 55.5bn. Whereas developed listedreal estate markets like Sweden
and Switzerland (53.7bn and 46.0bn)have not adopted the REIT status yet, REITs playan
importantrole in Belgium, the Netherlands and Spain,with high proportions being investedin
the tax-exempt investment vehicle.
Italy (3 REITs comprising 1.0bn) and Spain (71 REITs with 22.9bn) show, on average,
the lowest REITsize within Europe, with thetwo largest Spanish REITs (MERLINProperties
with 5.7bn and Inmobiliaria Colonial with 5.0bn) accounting for almost half of the Spanish
REIT market size. In contrast, France is characterized by a large average REIT size, with
Gecina beingvalued at 9.8bn and Klepierre at 8.6bn.WFD UnibailRodamco representsthe
largest European REIT with a market capitalization of 18.2bn (EPRA, 2019a).
3. Theoretical background
Different theories have evolved to understand the phenomenon of setting the offer price at a
discount at equity offerings.
Asymmetric information and value uncertainty theory
Rock (1986) was one of the first to explain underpricing using informational disparities
between the partiesinvolved at equity issuances. As investors with informational advantages
create a negative externality for uninformed investors by only subscribing when the offer
price is below the expected true value, uninformed investors are permanently faced with
negative returns. Underpricing is suggested to be necessary tokeep uninformed investors in

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