Brounen, Dirk

Eichholtz, Piet M.A.

English

Research Papers in Economics

GOING PUBLIC ON THE EUROPEAN PROPERTY SHARE MARKET  
 
By Dirk Brounen and Piet Eichholtz 
Contents 
1.  RECENT MARKET DEVELOPMENTS  
2.  IPO OPPORTUNITIES  
3.  CONCLUSION  
4.  ENDNOTES  
5.  EXHIBIT 2 Property Share Market Statistics, 1984-2001  
6.  EXHIBIT 3 European Property Company IPOs by Country and by Year  
7.  EXHIBIT 5 Sample Statistics of Initial-Day Returns  
8.  REFERENCES  
Europe has had a listed property market for over a century. British property companies like Cardiff 
Property and Warner Estates were established in 1886 and 1891, and the continent even preceded 
England in this respect, with companies like the French Compagnie EMGP (1850) and the German 
Concordia Bau und Boden (1860). These companies are all still listed on European stock exchanges. 
Despite this early start, the European property share market did not really get off the ground very 
quickly. For most of the early 20th century the European market consisted of only a handful of primarily 
British companies. Gradually, however, the market grew, and by 1984 the European listed property 
market consisted of 67 companies, which were listed in eight different countries with a total market 
capitalization of $12.31 billion. At that time the North American listed property share market consisted 
of 28 companies representing a total market capitalization of $5.28 billion.( n1) 
Since then, the European property share market has grown much more quickly. This article will show 
how the European property share market has developed in the last two decades. We will first describe 
the key market developments that have helped the European listed property market mature, paying 
particular attention to the rise and performance of initial public offerings during the 1990s. 
RECENT MARKET DEVELOPMENTS  
Over the years, and especially during the 1990s, the European and North American markets grew 
rapidly both in numbers of property companies and in market values. This development is illustrated in 
Exhibit 1, in which the market capitalizations of both markets are plotted against each other for the 
period 1984-2001. From this graph, it is clear that the European market has experienced a rather 
steady growth path, while the North American market has had two distinct phases of growth around 
1992 and 1997, and has shown little growth outside of these. 
Also in Exhibit 1, we have plotted the GPR-General total return indices in U.S. dollars for both areas 
for the period 1984-2001. This allows one to compare the performance of European listed property 
shares  with  their  North  American  counterparts.  The  graph  shows  broad  similarity  in  market 
development over the sample period, but the slump in the property markets of the late 1980s has 
obviously had a much stronger effect on the performance of listed property in North America than it did 
on the European property share market. The American market has also shown a stronger recovery in 
the 1990s. 
Exhibit 1 also suggests that the North American market has been more volatile than its European 
counterpart, creating significant diversification opportunities for United States investors by investing in 
the relatively stable European listed property. The market statistics, which are presented in Exhibit 2, 
highlight these differences in market characteristics. The mean total U.S. dollar returns of both markets 
hardly differ, even after incorporating the effects of the relatively weak euro in recent years. The real 
difference between the respective continental markets seems to lie in the relatively high volatility of the 
North American market over the sample period: the monthly standard deviation was 4.3%, while the 
corresponding number for Europe was 3.8%. The combination of these results indicates that during the 
sample period the European listed property market offered slightly superior risk-return characteristics. The European market has grown thanks to a rising number of listed property companies as well as an 
increase in the average size of individual listed property companies. The former development has 
meant that a substantial number of property company initial public offerings (IPOs) have occurred. We 
now address the attractiveness of these IPOs to investors in European property companies. 
IPO OPPORTUNITIES  
IPOs  tend  to  provide  interesting  opportunities  both  for  investors  and  academics.  Over  the  years 
numerous studies have reported the anomalous price behavior that is associated with the debut of a 
stock on the public market. Ibbotson [1975] was among the first to show the underpricing of IPOs by 
documenting initial-day excess returns of 11.40% on United States common stock IPOs.( n2) Since 
then many studies addressing this issue all have confirmed this remarkable finding, indicating that 
IPOs generally are interesting investment opportunities. Ling and Ryngaert [1997] have investigated 
this issue for United States equity REITs by analyzing 85 issues that occurred in the period 1991-1994. 
Their  results  showed  a  mean  market-adjusted  initial  day  return  of  3.60%,  indicating  that  IPO 
underpricing  also  occurred  in  the  relatively  transparent  listed  real  estate  market,  but  that  the 
underpricing was substantially less severe than it was in common stocks. 
Following this example we gathered a sample of 83 European property companies that were first listed 
on  the  market  in  the  period  1990-2000.(  n3)  We  analyzed  both  the  initial-day  and  aftermarket 
performance in order to determine both the short- and long-run appeal for investors. Exhibit 3 shows 
the breakdown of our European sample across years and countries. From this table, we can conclude 
that the United Kingdom has been by far the leading market in number of IPOs, and that Sweden and 
France have also been quite important. 
By comparing the closing price of the first day of trading with the offering price of the IPO, we derived 
the  initial-day  return.  After  correcting  these  returns  for  the  corresponding  market  return  we 
documented the results presented in Exhibits 4 and 5. For the sample as a whole we document a 
significant average market-adjusted initial day return of 3.43%, which is in line with the 3.60% that Ling 
and Ryngaert [1997] documented for the U.S. equity REIT market. The relatively modest initial-day 
returns correspond with findings of Alli, Yau, and Yung [1994], who documented differences in IPO 
price  behavior  resulting  from  sectoral  differences  regarding  transparency  and  uncertainty.  They 
analyzed the price behavior surrounding IPOs in the heavily regulated financial sector, and reported a 
5.28%  initial-day  return.  By  comparing  these  outcomes  with  results  from  other  sectors,  they 
distinguished a direct link between sectoral risks and IPO underpricing. 
Given the relatively stable and transparent nature of the real estate sector our results confirm this 
sectoral hypothesis, but still indicate a modest anomaly for the very short-run. A recent study by Aaij 
and Brounen [2001] examined the price behavior of European IPOs in the most risky sector of all, the 
high-tech industry. For a sample of 361 European high-tech IPOs from 1998 onwards, they reported 
an average initial-day return of 47.24%. For comparison, we also report the distribution of these initial-
day returns in Exhibit 4. The initial-day returns for the high-tech sample are much more strongly spread 
out  on  the  upside,  while  the  downside  looks  similar  to  the  property  share  market.  These  positive 
outliers cause the large difference between the mean and median for the high-tech sample, and can 
be diagnosed by the high kurtosis and skewness values. For the relatively stable listed property market 
the  distribution  is  much  more  concentrated  around  its  mean,  resulting  in  a  lower  kurtosis  and 
skewness and a much smaller difference between the mean and the median initial-day return. An 
interesting  finding  is  that  the  relationship  between  the  number  of  positive  and  negative  initial-day 
returns is nearly the same for both industries. 
Although the first blow is half the battle, investors are typically interested in the long-run performance 
of an investment. Ritter [1991] observed that the strong initial performance only lasts for a few weeks 
and that IPOs in general perform relatively weakly in the long run. For a sample of 1,526 common 
stock  IPOs  between  1975  and  1984,  Ritter  found  an  underperformance  of  a  control  sample  of 
matching stocks by 27.39% during the first three years after listing. 
We tracked the performance of the IPOs in our sample up to their first anniversary of public trading in 
order to distinguish whether this aftermarket slump is also present in the European listed property 
market.  We  computed  buy-and-hold  returns  for  each  company  and  aggregated  these  results, 
generating the aftermarket performance index presented in Exhibit 6. For the sample as a whole we 
find a first-year total return of 8.04%, on average. In order to correct these returns for movements in the overall markets we subtract the corresponding GPR-General National returns, and observe an 
average  market-adjusted  return  of  -0.96%.  Again,  this  accords  with  the  literature,  and  again  we 
document results that are significantly milder than for other industries. This is illustrated by the fact that 
only 12.72% of the property company IPOs in our sample are trading below their initial IPO offering 
price on their first anniversary of public listing. For the European high-tech IPOs this number was 
38.36%, indicating a more drastic slump in the aftermarket. 
Combining these short- and long-run performance results, we can conclude that European real estate 
IPOs offer interesting opportunities for investors, since modest short-term abnormal returns do exist, 
while a severe aftermarket slump is rare. 
CONCLUSION  
In this article we have shown some of the many investment opportunities that are concealed on the old 
continent. The European listed property market has expanded and performed steadily over the past 
decade.  Non-European  investors  can  use  this  market  to  acquire  exposure  to  European  property 
relatively  cheaply  and  quickly.  Although  consolidations have  been  numerous,  the  number  of  listed 
property companies has continued to grow due to the steady flow of IPOs. Our analysis shows that 
these IPOs perform strongly on their first day of trading, offering an initial day return of 3.43%. In the 
aftermarket this strong performance is transformed into returns that are more in line with the rest of the 
market. 
ENDNOTES  
The authors thank Kees Koedijk of Kempen & Co and Jeroen Beimer of Global Property Research, 
Amsterdam for helpful comments and assistance. The authors take sole responsibility for any errors. 
( n1) These numbers are from the Global Property Research database. 
( n2) For a broad discussion of empirical evidence regarding initial aftermarket price behavior of IPOs, 
see Smith [1986]. 
( n3) This sample is the Pan-European version of the sample in Brounen and Eichholtz [2002]. 
GRAPH: EXHIBIT 1 Market Capitalization and Total Returns for 1984-2000 (U.S. Dollars) 
EXHIBIT 2 Property Share Market Statistics, 1984-2001  
Legend for Chart: 
 
A - Market Statistics 
B - Europe 
C - North America 
 
    A                                   B        C 
 
Mean Monthly Return(a)                0.69%     0.69% 
 
Mean Annual Return                    8.58%     8.63% 
 
Monthly Standard Deviation            3.80%     4.30% 
 
Minimum Monthly Return               -9.75%   -19.84% 
 
Maximum Monthly Return               12.73%    13.79% 
 
Market Capitalization 1985(b)        11.96      6.07 
 
Market Capitalization 1990           63.00     17.51 
 
Market Capitalization 1995           89.26     33.71 
 
Market Capitalization 2001          119.87    152.51  
(a) Both the mean monthly and annual returns are calculated 
using geometrical means of discrete returns. The underlying 
time series are denoted in U.S. dollars. 
 
(b) The market capitalizations are denoted in US$ billions. 
 
Global Property Research. 
EXHIBIT 3 European Property Company IPOs by Country and by Year  
Legend for Chart: 
 
A - Country 
B - Number of IPOs 
C - Year 
D - Number of IPOs 
 
   A                     B       C        D 
 
Austria                  4      1990      3 
 
Belgium                  6      1991      5 
 
Denmark                  1      1992      8 
 
Finland                  1      1993      3 
 
France                  10      1994     16 
 
Germany                  5      1995      3 
 
Italy                    1      1996     12 
 
The Netherlands          2      1997      7 
 
Norway                   1      1998      5 
 
Spain                    1      1999     11 
 
Sweden                  12      2000     10 
 
Switzerland              3 
 
United Kingdom          36 
 
Total                   83    Total      83 
GRAPH: EXHIBIT 4 Initial-Day Return Distributions of European High-Tech and Property Companies 
EXHIBIT 5 Sample Statistics of Initial-Day Returns  
Legend for Chart: 
 
B - Real Estate IPOs 
C - High-Tech IPOs 
 
     A                                    B         C 
 
Mean Initial-Day Return                 3.43%     47.24% 
 Median Initial-Day Return               1.29%     17.21% 
 
Maximum Initial-Day Return             31.85%    900.00% 
 
Minimum Initial-Day Return            -10.54%    -45.87% 
 
% Negative Initial-Day Return          14.50%     15.50% 
 
Skewness                                 1.69       4.32 
 
Kurtosis                                 7.12      30.52 
GRAPH: EXHIBIT 6 Aftermarket IPO Performance 
REFERENCES  
Aaij, S., and D. Brounen. "High-Tech IPOs: A Tale of Two Continents." Working paper, 2001. 
Alli, K., J. Yau, and K. Yung. "The Underpricing of IPOs of Financial Institutions." Journal of Business 
Finance and Accounting, 21 (1994), pp. 1013-1030. 
Brounen, D., and P.M.A. Eichholtz. "Initial Public Offerings: Evidence from the British, French and 
Swedish Property Share Markets." Journal of Real Estate Finance and Economics, forthcoming, 2002. 
Eichholtz,  P.M.A.,  H.  Op  't  Veld,  and  M.  Schweitzer.  "REIT  Performance:  Does  Managerial 
Specialization  Pay?"  In  P.  Harker  and  S.  Zenios,  eds.,  Performance  of  Financial  Institutions. 
Cambridge: Cambridge University Press, 2000. 
Ibbotson, R.G. "Price Performance of Common Stock New Issues." Journal of Financial Economics, 2 
(1975), pp. 235-272. 
Keloharju,  M.  "The  Winner's  Curse,  Legal  Liability  and  the  Long-Run  Price  Performance  of  Initial 
Public Offerings in Finland." Journal of Financial Economics, 34 (1993), pp. 251-277. 
Ling, D.C., and M. Ryngaert. "Valuation Uncertainty, Institutional Involvement, and the Underpricing of 
IPOs: The Case of REITs." Journal of Financial Economics, 43 (1997), pp. 433-456. 
Michaely, R., and W.H. Shaw. "The Pricing of Initial Public Offerings: Tests of Adverse-Selection and 
Signaling Theories." Review of Financial Studies, 7 (1994), pp. 279-319. 
Ritter, J.R. "The Long-Run Performance of Initial Public Offerings." The Journal of Finance, 46 (1991), 
pp. 3-27. 
Rock, K. "Why New Issues Are Underpriced." Journal of Financial Economics, 15 (1986), pp. 187-212. 
Smith,  C.W.  "Investment  Banking  and  the  Capital  Acquisition  Process."  Journal  of  Financial 
Economics, 15 (1986), pp. 3-29. 
~~~~~~~~ 
By Dirk Brounen and Piet Eichholtz 
DIRK  BROUNEN  is  a  doctoral  candidate  at  the  University  of  Amsterdam  in  the  Netherlands. 
dirkb@fee.uva.nl 
PIET EICHHOLTZ is senior associate at Kempen & Co and professor at Maastricht University and at 
the University of Amsterdam in the Netherlands.peic@kempen.nl 
 
©Euromoney  Institutional  Investor  PLC.  This  material  must  be  used  for  the  customer's  internal 
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Investor PLC.  

High-Tech IPOs: A Tale of Two Continents.&quot; Working paper,

Initial Public Offerings: Evidence from the British, French and Swedish Property Share Markets.&quot;

Investment Banking and the Capital Acquisition Process.&quot;

Price Performance of Common Stock New Issues.&quot;

The Long-Run Performance of Initial Public Offerings.&quot;

The Pricing of Initial Public Offerings: Tests of Adverse-Selection and Signaling Theories.&quot;

The Underpricing of IPOs of Financial Institutions.&quot;

The Winner's Curse, Legal Liability and the Long-Run Price Performance of Initial Public Offerings in Finland.&quot;

Valuation Uncertainty, Institutional Involvement, and the Underpricing of IPOs: The Case of REITs.&quot;

Why New Issues Are Underpriced.&quot;

Going public on the European share market.

http://arno.unimaas.nl/show.cgi?fid=10734

Going public on the European share market.

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Research Papers in Economics