Real estate property fair value and leverage - The relationship to the market value in the Nordics
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School of Business |
Master's thesis
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Date
2024
Department
Major/Subject
Mcode
Degree programme
Accounting
Language
en
Pages
65
Series
Abstract
This thesis focuses on the relationship between the market value and the independent variables: fair value and leverage. In addition to the independent variables, the analysis has control variables denoting the country allocation inside the Nordics and the years in operation for the company. The data is covering Nordic real estate companies that form OMX Stockholm Real Estate GI including 51 companies. Investment properties cover the largest amount of the company’s balance sheet while using leverage remains crucial for the companies investing in real estate. The relation of these variables to the market value of the company is measured during an observation period ranging from 2007 to 2022. The observation period has been selected for the unique market environment it provides to observe changes in the relation between the variables. The period covers the financial crises, the European debt crises, the low-interest rate period, and the interest rate hike in 2022. This provides a turbulent period where the aim of the research was to provide clarity on how the relationship has evolved over time. The theoretical section covers prior literature on capital structure, and leverage, and ties it to the accounting standards determining how companies should disclose their investment properties in their balance sheets. Using leverage can be seen as an attractive opportunity to lower the weighted average cost of capital from the perspective of optimal capital structure. This thesis also investigates how companies have shifted their leverage during the historically low-interest rate period. The relationship of the variables has been tested in this thesis with two different regression models which are made with the same financial data of the companies. The data section is divided into two parts, Model One and Two. Model One analyses the absolute values of the variables and their relation to the market value. Model Two analyses the year-on-year change of the variables to eliminate the largest differences within the data which includes a large variety of companies. The regression results show a strong relation measured with the R-squared between the dependent and independent variables. The strength of the relation varies over time and is at its weakest during the market shocks that have taken place during the observation period.Description
Thesis advisor
Beyer, BiancaKeywords
fair value, real estate, leverage, financial crisis, regression