Leverage, Liquidity, and Governance as Determinants of NAV Discounts in European Real Estate

This study investigates the financial and governance determinants of Net Asset Value (NAV) discounts in European listed real estate, with a focus on leverage, liquidity, and corporate governance quality. NAV discounts, representing the divergence between market capitalization and underlying asset values, have long challenged the efficiency of real estate securities markets. Building on a conceptual framework that integrates firm-specific financial fundamentals with governance and disclosure mechanisms, the study addresses the problem of persistent valuation anomalies across European REITs and property companies. A panel regression approach is applied to firm-level data, incorporating measures of capital structure, profitability, share liquidity, and governance indicators, while controlling for macroeconomic and market cycle effects. The results indicate that higher leverage and weak debt flexibility exacerbate NAV discounts, whereas strong profitability and liquidity reduce valuation gaps. Furthermore, robust governance structures and ESG transparency moderate the adverse impact of leverage and amplify the positive role of profitability. Investor sentiment and market phases are shown to further condition the persistence and magnitude of discounts. These findings have implications for theory and practice: they refine the understanding of real estate pricing inefficiencies and provide actionable insights for investors, policymakers, and listed firms seeking to mitigate valuation gaps through financial discipline, enhanced governance, and transparent disclosure. Keywords NAV discounts, European real estate, leverage, liquidity, corporate governance, REITs, transparency, investor sentiment, valuation anomalies, ESG