Have diverse boards strengthened REITs?

In September, a new paper looked at the effectiveness of board diversity on the relative pricing – stock price to net asset values (NAV) – of European real estate investment trusts (REITs). 

The paper, Board Diversity and NAV Discounts, examined whether gender, age and ethnic diversity within corporate boards have helped firms trade at a premium over fundamental values.

Its results showed that momentum, investor sentiment, and age diversity has had a significant positive effect on the price-to-net-asset-value (P/NAV) ratio of European REITs, and that the “joint effect of age, gender, and ethnicity have a pervasive effect on the cross section of REIT P/NAVs”.

The report’s authors used NAV as a measure in real estate, because, they say, it is so reliable. And the implications are clear, they believe. “I think boards have to ask themselves, do we really have enough diverse people here? If not, let’s pay attention to this,” says co-author Dennis van Oosten, an independent real estate analyst.

According to van Oosten, it has been easy to ignore diversity and inclusion in recent years, because times were good. “The real estate industry in the last 20 years hasn’t had a lot of hardship,” he says. “They did okay, or even well. If the market is doing okay, or even well, then you can’t make a lot of mistakes.” But when times get harder, it will become more apparent that more diverse perspectives bring value, he says. “I do think that if you are more diverse as a company, you have more agility.”

For Dirk Brounen, the second co-author, the findings have brought up the issue of governance. “Pension funds are very outspoken on ESG,” he says. “They will vote with their feet. And I have found that diversity is often listed in the ‘S’ of ESG. You want to offer equal opportunities for everyone. But our research shows that it is more diverse boards that bring benefits. This is something that can determine the risk profile of your company. Therefore, it is more the ‘G’ of governance. Diversity is a big part of good governance, and it is measurable.”

Like van Oosten, he is concerned about what happens when markets change. “You don’t get insight if you don’t talk to people,” says report co-author Dirk Brounen, professor of real estate at Tilburg University. “If you look at the people who get awards for good leadership, 90% of those guys are white and in their late-50s, and they have been right for 25 years. But that can be really dangerous when markets shift and change.” 

Brounen wants businesses to challenge themselves, and each other. “Saying the uncomfortable stuff should be appreciated more,” he says. “We can be more outspoken.”