Real Estate Shares and the Stock Market Turmoil

Intro

So, it happened. Stock exchanges were in free fall. Finally, the coronavirus switched off the light. This article issued by Die Presse succinctly describes the situation, as we had it for the Vienna Stock Exchange on March 18, 2020. Other stock exchanges like Wall Street, London or Frankfurt were in no better condition. Friday, March 20, mornings and first news are in that stock exchanges are stabilizing (see for example Die Presse or Handelsblatt for a detailed account).

Of course, what keeps the market busy, is the question of when the market crash stops and if a starting reversal of share prices could be sustainable. When do markets bounce back? An attempt to address this insecurity is done by this very thoughtful article by John Authers in Bloomberg Opinion. It does not come as surprise, but the hope for the quick calming down is -maybe- premature. Another detailed run-through of a stock crash build-up is given by John Kenneth Galbraith in The Great Crash 1929 and actually confirms the position of no fast reliefs.

In this short article I am more focusing on the share price development of exchange traded real estate companies. In part, I take this wonderful article by 'first differences' as a blueprint to incorporate alternative monitoring tools.

Exchange Traded Real Estate Companies

The survey comprises of real estate companies traded at the Vienna stock exchange as well as at the Frankfurt stock exchange. Portfolio list as follows:

Patrizia AG (PAT.DE), Adler Real Estate AG (ADL.DE), alstria office REIT-AG (AOX.F), Deutsche Wohnen SE (DWNI.DE), TLG Immobilien AG (TLG.DE), Vonovia SE (VNA.DE), LEG Immobilien AG (LEG.DE), DIC Asset AG (DIC.DE), TAG Immobilien AG (TEG.DE), Deutsche EuroShop AG (DEQ.DE), CA Immobilien Anlagen AG (CAI.VI), Immofinanz AG (IIA.VI), S IMMO AG (SPI.VI), Warimpex Finanz- und Beteiligungs AG (WXF.VI), UBM Development AG (UBS.VI)

The observed time frame, where applicable, is from January 1, 2005 to March 19, 2020 resp. March 20, 2020. This means that the time series includes the financial crisis in 2008 and the currently unfolding share price crash, with the credit crunch and the coronavirus as external triggers. Overall, the data set consists of appr. 45,800 observations and 15 companies. Data is derived from Yahoo Finance using R-package tidyquant.

Situation as of March 19, 2020

Real estate assets are often referred to as 'Betongold', i.e. an asset class to keep your money in times of crisis. Though, what strikes most when looking at the historic timeline is that this is obviously not so true for public traded real estate shares. At least in times of big stock crashes, real estate shares behave cyclical and follow the negative market trend. See the historic share prices of the observed German sub-portfolio:

And here are the historic share prices of the observed Austrian sub-portfolio:

Now, let's have a look at thedaily changes in share pricesover the observed time period.

The graph clearly indicates themassing of increased volatilityin the overall portfolio with the 2008-crisis, but also shows the grave increase in share price volatility as a consequence of the current unfolding developments in the stock market. In general, volatility seems to stay on a higher level after the 2008-situation than it was before the financial crisis. Although, the increase in the dailytrading volumeis partly true to new companies entering the market. Nevertheless, the stock exchange (Vienna and Frankfurt) shows heavy trading under current market conditions.

In a slight attempt to revealpossible reversing patterns in share price movements, the respective price change of each share is put into relation to the price change of the previous period of the same share. In the graph below the actual price change is put on the y-axis and yesterday's price change is put on the x-axis. Results as follows:

In case there would be a general short-term tendency of reversing a price movement, the points would get along the scattered green line. But, they are not. So based on the data, there seems to be no evidence that there is a tendency of share prices turning around.

In a further effort to reveal market behaviors, price changes for each share of the previous period were put into baskets from worst to best price movements. Then, the average price change for each share in each of those baskets was calculated. Likewise, the percentage of positive price movements in the current period for each share and basket was computed. The percentage of positive price movements were put in relation to the average price change level of each share and basket. Here are the results:

In order to give a positive price changing signal, data points for the worst baskets (out of the previous period) would have to gather in the top-left quadrant (indicating more positive than negative price movements in the current period for those baskets). Negative price changing signals would be accompanied by data points gathering in the bottom-right quadrant, i.e. the current period has more negative than positive price changes in the current period given the best baskets from the previous period. In our case, there is neither but noise. There is no obvious signal for a sustaining price reversal.

Situation as of March 20, 2020

On March 20, 2020, during trading time, the share price for e.g. CA Immobilien Anlagen AG was already up by 7.8% to EURO 24.2, price for S IMMO AG was up by 10.53% to EURO 14.7 resp. share price for Patrizia AG was up by 7.39% to EURO 18.01. The closing rates for this day:

Company                        Price Change        Closing Price
                                  (in %)             (in EURO)
------------------------------I-----------------I----------------
Patrizia AG                       +  6.29              17.90
Adler Real Estate AG              +  5.57               6.44
alstria office REIT-AG            +  7.78              11.64
Deutsche Wohnen SE                +  1.44              30.37
TLG Immobilien AG                 +  6.88              13.36
Vonovia SE                        +  2.88              42.17
LEG Immobilien AG                 + 15.02              88.82
DIC Asset AG                      + 11.42               8.10
TAG Immobilien AG                 +  8.61              17.29
Deutsche EuroShop AG              + 14.07              12.00

CA Immobilien Anlagen AG          +  4.68              23.50
Immofinanz AG                     +  4.38              14.30
S IMMO AG                         +  8.57              14.44
Warimpex Finanz- und Bet. AG      + 15.00               1.04
UBM Development AG                +  4.66              24.70

Without exception, the share prices for all of the companies in the surveyed portfolio are up. Though, the gains during the trading day could not be fully kept. The trading volume was again enormous with 16.2 million shares moved (after 12.6 millions of shares the day before). This is in accordance with the market situation and stresses once more the cyclical behavior of the real estate shares. Süddeutsche Zeitung has more on this day's happenings. But is it already a sustainable turnaround or just a short respite?

Monitoring price changing behavior for this day results in:

Again, there is no clear signal for a sustainable turnaround.

Conclusion

It got rough those days. And as it turns out, real estate shares are quite cyclical.

Though, the more pressing question is when this market downturn stops. Given Friday's development in the stock markets, there is the possibility that a turnaround is already achieved. Nevertheless, it could also mean that Friday was just a short break before the next wave of falling prices moves in.

In this context, I experimented with alternative, easy to implement monitor tools trying to cover an upcoming turning of tides. So far, there is no clear signal of a general and sustainable share price reversal. Next days will show how the markets roll out and if it is worth keeping those tools.

I'll keep you posted.

References

Die Presse: Wiener Börse weitet Verluste stark aus/ March 18, 2020

Handelsblatt: US-Handel erneut zeitweise ausgesetzt - Dow Jones schließt deutlich im Minus/ March 18, 2020

Handelsblatt: Absturz am Aktienmarkt geht weiter - Dax schließt fünf Prozent im Minus/ March 18, 2020

Die Presse: Europäische Leitbörsen deuten Stabilisierung an/ March 20, 2020

Handelsblatt: Dax steigt gut sechs Prozent - Osram Aktie legt um mehr als 20 Prozent zu/ March 20, 2020

Bloomberg Opinion: Don't Get Comfortable. Stocks Also Bounced in 1929/ March 11, 1929

The Great Crash 1929 - The classic account of financial disaster by John Kenneth Galbraith, 1954 and 1975

Stock market crisis: is there a tennis ball effect? published by first differences and Rbloggers/ March 16, 2020

Süddeutsche Zeitung: Dax im Plus, Euro stoppt Abwärtstrend/ March 20, 2020