The stock market is a tough place for real estate companies looking for value

The stock market is proving difficult ground for real estate businesses. That’s the takeaway from the news that Hibernia Reit’s board of directors has unanimously recommended a takeover bid for Canadian real estate giant Brookfield.

Hibernia says its shares have traded at an average discount of 20.9% to the net tangible value of its assets over the past five years, and closer to 30% consistently over the past three years.

It seems counter-intuitive that in times of a real estate crisis in Ireland, a property company cannot guarantee a market valuation in line with the net value of its tangible assets. Hibernia is an office landlord, not a residential landlord, and we are just emerging from a two-year Covid lockdown that threatens a very different environment for the world of work. But even so, recent deals in the sector have shown continued growth, particularly for the modern, energy-efficient offices that Hibernia has developed in prime locations, primarily in Dublin.

Just last month, Hibernia chief executive Kevin Nowlan said Ireland’s strong economic performance ‘coupled with high levels of foreign direct investment has helped occupier activity pick up in 2021 and … we are optimistic that the positive momentum in the office market will continue in 2022, absent an adverse change in the direction of the pandemic”.

We have of course had the invasion of Ukraine since then and a recent spike in Covid cases, but there is no indication that the long-term outlook for the office market has changed since February.

But Hibernia shares have never traded at the offer price: their peak at €1.554 dates back to 2018. More recently, they languished at €1.18 on Thursday just before the offer.

Davy analysts say the offer of €1.634 per share – including a dividend payment of 3.4 cents – represents a 3% premium to the current net asset value. Based on this, it’s hard to say no.

Although the offer came out of nowhere, Davy’s Colin Grant said it was no surprise given the shares’ consistent underperformance relative to the value of the company’s underlying assets.

And so Hibernia seems set to follow the example of Stephen Vernon, who twice oversaw the delisting of property companies from the Irish stock exchange – first with Green Property in an MBO in 2002, then with the sale of Green Reit in 2019. On both occasions, the catalyst was a perceived undervaluation of the share price.

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